Ukraine

Since the Russian invasion of Ukraine, oil posted its first weekly loss and this kicked off one of the most volatile periods in the history of the oil market. Oil futures declined by 5.5% last week and Brent crude fell by 4.6%. The international benchmark ended above $112/barrel which marked a more than $30 drop since its Monday rally on 7^th March which saw prices surge to nearly $140.

Prices see-sawed over the five-day period due to a flurry of news including a US ban of Russian crude imports and UK’s gradual phasing out of the same. Increasing sanctions against Russia have prompted fears that an already tight oil market may be stretched further, due to the absence of the country’s 5 million barrels of oil exports.

Open interest in the main oil futures contracts has fallen to a six year low in recent days as traders retreat from risk. Volatility has shot up and exchanges have boosted margins, effectively raising the cost of buying and selling. Brent traded as high as $139.13/barrel and as low as $105.60/barrel, indicating extreme volatility. “Extreme intraday volatility perhaps says something about several things: degree of uncertainty, the nature of the news flow, the spill over from some chaotic spot markets and the relatively low liquidity levels at some points,” said Paul Horsnell, head of commodities research at Standard Chartered Plc.

Another contributor to fall in oil prices was the suspension of negotiations between Iran and world powers on Friday to restore a 2015 nuclear deal. Russia sought U.S. guarantees that sanctions imposed for its invasion of Ukraine wouldn’t affect its planned partnership with Iran and this led to talks coming to a standstill. Iran carried out a missile strike in Iraq following breakdown of nuclear talks and this prolonged the absence of Iranian barrels in a market desperate for additional supplies.

Other factors which are likely to test the global markets are whether Russia plans to pay its international debt and the Federal Reserve is likely to raise interest rates for the first time since 2018, which will potentially strengthen the dollar. Despite repeated urgings from consumers to boost output, OPEC+ has resisted calls from consumers to pump more oil, arguing that the surge in prices is driven by geopolitical tensions rather than a supply shortage.

Major oil companies such as, BP, Shell and ExxonMobil have made the tough decision to exit their joint ventures with Russian oil and gas companies. The US has announced a halt to all energy being imported by the US, a move which may make other countries to follow suit. This news is likely to adversely impact Russia’s oil exports which account for 6% of the global supply needed to match the 100 million barrel/day demand.