How high can he climb? Three scenarios how to proceed

Russian oil production plant

The country is the third largest oil producer in the world.

(Photo: IMAGO/ITAR-TASS)

Zurich Speculations about a possible rapprochement between the two warring parties Russia and Ukraine have caused oil prices to fall further. A barrel of the US variety WTI cost less than 100 US dollars per barrel (around 159 liters) on Tuesday and was traded for 97.78 dollars in early trading.

But the nervousness in the markets is great. The risks of crude oil prices rising above the previous record high of $147 a barrel are far from over, numerous oil market experts are unanimously warning.

According to Ehsan Khoman, oil market expert at Bank MUFG: “The market suffers from a triple deficit of low inventories, lack of production reserves and underinvestment.”

Helima Croft, oil market expert at RBC Capital Markets, also warns: “The more conditions in Ukraine deteriorate, the more politicians in the West come under pressure to pass even tougher sanctions.” Investors should therefore parallel the war in Ukraine prepare for a protracted economic war – which could have far-reaching consequences for oil prices.

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Russia is the third largest oil producer in the world. Most recently, the country exported between 4.5 and 5 million barrels per day on average. This corresponds to around five percent of global oil consumption.

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According to the International Energy Agency, there are also up to 2.8 million barrels per day of processed products such as petrol and diesel. Oil analyst Kohman confirms that this amount can hardly be replaced in the short term. How strongly the oil price reacts depends primarily on the West’s sanctions policy. How could it go on? Here is an overview of three possible scenarios.

Scenario 1: Europe continues to import Russian oil – oil prices rise to as much as 150 dollars

So far, only the USA has been able to bring itself to a complete ban on imports of oil, petrol, diesel and other crude oil-based products from Russia. The European Union has not yet followed these sanctions with reference to security of supply. From the point of view of the analysts at Bank of America, the most likely scenario is that things will stay that way. It could still be associated with a rise in oil prices to as high as $150 by the summer.
In this case, the bank RBC expects that in the next twelve months an average production volume of three to four million barrels per day could disappear from the market. This corresponds to around four percent of global demand. Because the Russian oil, which finds no buyers in the USA, initially remains in the country. In this scenario, however, there is no fundamental collapse in global energy trade flows.

High petrol and diesel prices

Gas station in Berlin: German drivers are already feeling the rising prices at the pump. How high can the price of crude oil go?

Photo: dpa

(Photo: dpa)

A good half of the loss of production can be compensated for with a delay of two to three months through reserve capacities from Saudi Arabia or the United Arab Emirates. More oil could bring the US shale industry and a return of Iran and Venezuela to international oil markets. But that will take time: According to the bank RBC, it will take twelve months for the loss of Russian oil to be compensated for by four million barrels a day.

Scenario 2: Europe joins the import ban – oil price rises up to 200 dollars

Should the war in Ukraine escalate, Europe could still decide to impose an import ban on Russian energy resources. In this case, up to six million barrels per day from Russian production could disappear from the market, estimates MUFG strategist Khoman.

The only remaining buyer for this oil would be China, which will probably not increase the purchase volume. Global energy trade flows would be severely disrupted by the sanctioning of Russian oil trade. In this case, Khoman believes an oil price of up to $185 per barrel is possible, while Bank of America expects $200 per barrel in an extreme case.
Such an embargo would also significantly increase the cost of the war for Russia. Russia would need to store excess oil that is not consumed or exported. However, according to calculations by MUFG, the country’s own oil storage facilities would be full to the brim after 25 days, meaning that Russia would have to stop oil production.

According to Khoman, this could not be restarted without further ado, even if the sanctions were later relaxed. “Many oil wells would run dry.” Russia’s oil sector would be hit in the long term.

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But the consequences for the West would also be difficult to assess. A loss of almost all Russian export oil would plunge the already tight oil market into a deficit in the long term. Petrol, diesel and heating oil in particular are becoming scarce in Europe. “It is difficult to find trading partners for Europe that could replace refined products,” warns RBC. Khoman adds: “The big question is how the energy stores are to be filled for next winter.”

Scenario 3: The price of oil falls – because the global economy slips into recession

Khoman only expects oil prices to ease if demand falls. In concrete terms, this means that the economic upturn, which is likely to drive oil demand to a record high this year, will have to lose momentum. “At best, growth will slow down; at worst, it will turn negative.”

It has not yet been decided that the global economy will slide into a recession. But the recent drop in crude oil prices are the first signs that market participants fear such a scenario. According to Khoman, there are already first examples of demand suffering from the high prices. He observes that the first plastic producers cut back their production because the high oil prices are squeezing margins.

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Khoman fears, however, that things must first get worse before they get better: MUFG expects oil to rise above $180 a barrel to trigger a broad drop in oil demand. However, this would be a bad omen for the global economy.

Both in the late 1970s and between 2004 and 2008, the price of oil had already risen to a level at which demand was eroding. This was followed by a recession in the global economy. Khoman is convinced: “The prospect of history repeating itself is substantial.”

More: Production stops and supply gaps: This is how the war drives the economy into crisis.

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