Ukraine-Russia tensions: Oil surges on supply fears

On Tuesday, oil and gas prices rose on fears that the Ukraine-Russia crisis will disrupt global supplies. After President Vladimir Putin sent soldiers into Ukraine’s east, the price of Brent crude oil reached a seven-year high of more than $99 (£73) per barrel.

Despite Western countries’ economic sanctions and measures to cut a crucial Russian gas pipeline, prices eventually stabilized. Early losses were also halted on the stock market. Following remarks by US President Joe Biden describing the US response, Wall Street rallied after plunging more than 1.5 percent in early trade on Tuesday. The Dow, on the other hand, plummeted 1.4 percent, while the S&P 500 sank 1% and the Nasdaq fell 1.2 percent.

Earlier, the Nikkei 225 index in Japan plummeted 1.7 percent, and the Shanghai Composite dropped over 1%, while stock indices in Europe and the United Kingdom ended broadly level, with the FTSE 100 up 0.1 percent. “The West is stepping very carefully right now,” said Russ Mould, investment director at AJ Bell.

Pain at the pump

After Saudi Arabia, Russia is the world’s second-biggest oil exporter and the world’s largest natural gas producer. Measures requiring the country to deliver less crude or natural gas would have “significant ramifications” on oil prices and the global economy, according to Manulife Investment Management’s Sue Trinh.

After hitting a record 149.12p a litre on Sunday, the RAC warned that the issue would push up UK gasoline prices even further. “Russia’s invasion of Ukraine is already driving up oil costs, and fuel prices will definitely grow inexorably towards the gloomy milestone of £1.50 a litre [of unleaded petrol],” warned RAC fuel spokesman Simon Williams.

“This is bad news for UK drivers who can’t afford to fill up their automobiles with gas.” However, the actions declared by the United States, the United Kingdom, and Europe so far fall short of the threats made in the event of an invasion.

The sanctions target Russian financial institutions, elites, and government agencies, with the goal of limiting the Russian government’s ability to generate funds on international financial markets. On Tuesday, German Chancellor Olaf Scholz also took the major step of banning the Nord Stream 2 pipeline, which would have brought gas directly from Russia to Germany.

In statements at the White House, US President Joe Biden said, “If Russian goes any further with this invasion, we stand ready to go any further.” He also cautioned that preserving Nato territory could cost the public money in the form of increasing energy prices. Oil prices have increased by more than 10% since the beginning of February as a result of the tensions.

Due to a combination of the Ukraine situation, a harsh winter in the US, and a lack of investment in oil and gas supplies around the world, Maike Currie, an investment director at Fidelity International, believes oil might rise above $100 a barrel. “Russia consumes one out of every ten barrels of oil consumed globally, making it a key role in the price of oil,” she added. “Of course, this will impact consumers at the pump.”

Although the majority of the oil and gas the UK imports is not from Russia, it would be affected by a spike in world prices. According to the RAC, average diesel prices in the UK hit 152.51p per litre on Monday, just below the previous high of 152.58p set on Sunday.

The cost of wholesale gas in the United Kingdom has also increased, with the cost for April delivery up 9% and the cost for May up 10% to 191p per therm. However, it remained lower than the all-time highs of around 400p per therm in December of previous year.

According to Shaistah Akhtar, a sanctions expert at the UK law firm Mishcon de Reya, the economic interdependence between Russia and Europe will likely constrain Western moves in the future.
But, she acknowledged, some of the restraint so far has been deliberate.

“They needed to give themselves some breathing room,” she explained. Even if the West does not take more forceful action, according to Edward Gardner, commodities analyst at Capital Economics, tensions are likely to keep oil prices high.

“It is not in either Russia’s or the West’s economic interests to use energy trade as a weapon against each other, but that does not rule out the possibility,” he said in a note on Tuesday. “Tensions with Russia might keep oil prices higher for longer, even if the West does not impose outright sanctions on Russia’s energy exports.”

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