US ban on Russian energy products to drive oil prices to new highs in near term

The global benchmark, US WTI crude surged more than 78 per cent so far this year. A similar trend was witnessed in the Asian Brent, which gained from a low of $77 a barrel in January this year to $130 a barrel this week. In the domestic market, futures prices are hovering at record highs, just below Rs 10,000 a barrel mark.

The global oil markets were already tight even before the Russia – Ukraine war. However, prices rose abruptly after Russia launched a full-scale military invasion into Ukraine on February 24 this year. As global supplies were already tight, the Russian invasion led to a supply shock because Russia is the third largest producer and the second largest exporter of crude oil.

Immediately after Russia invaded Ukraine, the US slapped sanctions on export of technology to Russia’s refineries. The US administration also announced a ban on Russian oil, natural gas and coal on Tuesday this week with a view of expanding economic sanctions.

Western countries have frozen the assets of Russia’s central bank, which limited its ability to access its dollar reserves. The US, European Union and the UK have also banned people and businesses from dealings with the Russian central bank. The western sanctions have already hammered Russia’s currency, Ruble and forced it to jack up interest rates.

The recent ban on exports from Russia may have a severe impact on global fossil energy prices. Since Russia is one of the key players in the global fossil energy market, a ban would send its customers rush for alternatives at any price. As per International Energy Agency data, Russian exports of crude and oil products to global markets is 7.8 million barrels per day, accounting for roughly 8% of the global oil use.

In the meantime, OPEC plus members including Russia, have decided to stick to their plans for a modest output rise in April. Global demand for oil rebounded sharply as the pandemic has waned, but the OPEC plus nations still have a shortage of 2.6 million barrels per day. A sharp decline in upstream investment and OPEC’s cautious approach means the group is unable to pump more oil into the market.

Traders continue to track the developments around the potential nuclear deal between the US – Iran. If Iran’s sanctions are lifted, it could pump more oil into global markets, which could help offset lost supply. Iran is one of the world’s largest oil producers, having an estimated 80 million barrels of crude oil in its reserves.

The bullish outlook on prices is likely to be intact in the near future. The expectations that in the event of a ban on Russian oil, no other supplier can quickly replace the overall shortage, may prompt investors to ramp up their medium-term bullish bets.

Inadequate supply from OPEC Plus countries and a delay in the US – Iran nuclear deal are likely to deepen the present supply crisis. A sharp decline in the US production and shrinking inventory levels amid a resurgence of demand from the Covid induced slump also lift oil’s bullish appeal. Meanwhile, measures taken by key producers to increase the supply may perhaps attract corrective selling later.


(The authors is Head of Commodity at Geojit Financial Services. View are personal)