Russia-Ukraine tensions upend commodities market with crude leading turmoil

Crude oil has rallied over 50 percent since start of the year and nearly half of it has come in the past one week since Russia started attacking Ukraine on February 24.

WTI crude has breached $116 per barrel for the first time since 2008 while Brent crude tested 2012 highs.

Strong demand, slow production growth

Global crude oil market has tightened significantly in the last few months owing to strong demand recovery and slow production growth. The tightness in global market has made crude susceptible to supply risks.

Russia is one of the biggest crude oil producers with production of around 10 million barrels per day--i.e. about 10 percent of the global supply.

Russia faces sanctions from West

With the Russia-Ukraine war underway, the US and other countries have imposed sanctions on Russia and this has fuelled supply concerns.

While Russia’s energy sector has not been directly targeted yet, banking and shipping restrictions are making trade difficult. To add to the crises, companies are reducing their exposure to Russian assets fuelling worries about future supply. US has also expressed willingness to target Russian energy exports.

IEA announcement irks markets

Russia is a major supplier in global market with no possible replacement and this has kept market players nervous. Market players were disappointed by International Energy Agency’s announcement that US and allies may release about 60 million barrels from emergency reserves. This is less than even 1 day of daily crude consumption.

While supply concerns relating to Russia are rising, OPEC and allies have continued with their gradual production hike stance despite rising prices and supply threats.

OPEC and allies this week decided to raise production by another 400,000 barrels per day for the month of April

US crude stocks fall below average levels

Adding to supply worries is the tightening US market. US crude stocks have fallen below average levels amid stable production and robust demand. US weekly inventory report noted an unexpected decline in US crude stocks this week, adding to supply concerns.

While supply risks have pushed prices higher, market players continue to overlook impact of higher price on demand. Inflation pressure has been high globally and the situation may worsen if energy and commodity prices continue to trade higher. Additionally, if inflation spirals out of control, central banks may be forced to act aggressively which may also hamper economic growth and thereby demand.

Overall, crude oil has continued to set fresh highs as market players continue to focus on supply risks and play down possible impact on demand. The recent leg of the rally is largely hinged on Russia-Ukraine tensions and if there are any sincere efforts to resolve the issue, it is possible that we may see an equally sharp correction in crude prices.

(Ravindra Rao, is CMT, EPAT, VP-Head Commodity Research, Kotak Securities)

Published on: Thursday, March 03, 2022, 07:01 PM IST