Why are oil prices so high?


What’s in the pipeline for oil this year?

In mid-February, tensions between Russia and Ukraine pushed oil prices steadily higher. Oil prices soared more than 2%, reaching their highest price in more than seven years, with Brent crude oil trading at $96.48 a barrel. Natural gas in Europe has been sourced mainly from Russia for some time, as Russia is one of the world’s largest oil producers. “Any disruption to oil flows out of the region would drive prices higher in a market struggling to meet increased demand for crude as economies recover from the pandemic,” said Rystad Energy’s Nishant Bhushan.

On February 21, political tensions escalated when Russian President Vladimir Putin formally recognized the independence of Luhansk and Donetsk oblasts, the two Ukrainian regions where breakaway states had established themselves independently of Ukrainian sovereignty. Putin then sent his own “peacekeeping troops” into the regions to liaise with the armies of breakaway states. As a result, natural gas prices in Europe rose by 13%, helped by German Foreign Minister Amalena Baerbuck’s announcement that approval of the Nord Stream 2 gas pipeline between Russia and Germany would be suspended. Brent crude oil rose as high as $99.50 a barrel before falling to $97.58 and European coal rose 7.9%. Let’s take a closer look at the state of oil and natural gas with this oil trading newsletter.

Resurrection

The arrival of Covid-19 in March 2020 dealt a severe blow to oil demand, which fell by 25% in a few weeks. Saudi Arabia, one of the world’s biggest oil producers, tried to organize a quick production cut to support prices. Russia decided not to cooperate, after which a price battle broke out within OPEC plus for about a month. OPEC plus then approved the biggest production cuts in its history, pushing US benchmark WTI oil below $40 a barrel. Not surprisingly, thousands of jobs have been lost in the oil industry.

Effective Covid vaccines were expected to boost the global economy and boost oil demand, but the pace of the recovery surprised analysts. “How quickly and how violently it swung in the opposite direction,” said an analyst at the Gunvor Group. While demand in April was only 70% of pre-crisis levels, it was already 90% in the third quarter of 2020.

Shortly after 2021, the second wave of the virus arrived, but oil consumption was not yet expected to drop below that level. By the middle of the year, the problem had changed, as prolonged underinvestment in energy meant that supply was not ready to meet rising demand. This situation, as expected, began to push up oil and gas prices. Then came the cold weather in September and the need for heating, pushing oil prices above any level they had reached in the previous seven years. Rising prices added to the broader challenge of inflation, and calls by world leaders to increase oil production seemed to be forgetting their green energy goals.

Economic consequences

The ramifications of the impasse in Ukraine were not only being felt in financial markets, but will “undoubtedly push fuel prices inexorably towards the grim £1.5 per litre” milestone in the UK, RAC’s Simon Williams suggested. Other broader impacts could include lower consumer spending due to higher fuel prices, slower economic growth, supply chain disruptions and cybercrime risks, said JPMorgan & Co, which also feared the crisis could further erode investor confidence. Stock markets around the world were sensitive at the end of February 2022 due to the belligerent stance of central banks and high inflation, and the geopolitical crisis threatened to exacerbate their problems.

JPMorgan also suggested that oil giants such as Exxon Mobil Corp and companies involved in defense such as Lockheed Martin could see their revenues improve as a result of the situation. Another possible outcome of the massive gains in energy stocks is that oil-producing nations like Saudi Arabia could see a boost.

Looking to the future

Russel Hardy, CEO of Vitol Group, the world’s largest independent oil trader, sees a bleak future for oil prices this year, saying: “Demand will increase in the second half of 2022 to such an extent that prices will remain “suspended for a longer period of time” above $100 a barrel Demand is expected to remain strong as long as economies can continue to recover from the effects of the Covid pandemic Those looking to start trading with oil in the form of CFDs in the coming weeks should monitor the situation in Ukraine closely, stay on top of high-quality market analysis, and finally keep a close eye on whether OPEC plus is responding to US demands. to increase oil production.

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