Oil prices expected to rise after new highs as Russia-Ukraine conflict rages on

Xinhua
Another strong week for oil ended as Brent crude, a global benchmark, reached a fresh high. Analysts expect the uptrend to continue with the Ukraine crisis evolving.
Xinhua

Another strong week for oil ended as Brent crude, a global benchmark, reached a fresh high. Analysts expect the uptrend to continue with the Ukraine crisis evolving, with the sting of rising prices impacting consumers worldwide amid higher inflation.

Soaring prices

Brent crude for May delivery increased 6.9 percent to close at 118.11 US dollars a barrel on the London ICE Futures Exchange on Friday, the highest settlement since February 2013. It briefly touched 119.30 dollars on Thursday at one point. The West Texas Intermediate, another benchmark, also saw its highest finish since September 2008.

The upsurge came as investors disregarded the latest updates on the oil supply. The Organization of the Petroleum Exporting Countries and its allies announced on Wednesday that it would stick to existing plans for a modest oil output increase of 400,000 barrels per day in April, despite supply fears amid the Ukraine crisis.

Also, the International Energy Agency (IEA) said Tuesday in a press release that its members had agreed to release 60 million barrels of oil from their emergency reserves to ease any supply shortfall caused by the Russia-Ukraine conflict. But analysts said it would hardly help.

According to the IEA, Russia is the world's third-largest oil producer and the largest exporter. The country's exports of about 5 million barrels a day of crude oil represent roughly 12 percent of global trade. Therefore, any possible risks to Russian energy exports could have global ramifications.

Analysts at XTB, a European brokerage house, said, "logistic connections and the balancing of the oil market mean that even a reduction in the supply of 5 million barrels per day may have a huge impact on oil prices."

When the IEA failed to send prices down, it highlighted "the extent of the fears in the oil market," said Fiona Cincotta, an analyst from British financial services provider City Index. "The move does appear to have paused the rally, however this is likely to be temporary. A more sustainable increase in supply is needed to pull the price lower."

Ripple effects

The fallout of soaring oil prices could quickly ripple. Noting that investor nervousness is perfectly understandable given the uncertainly surrounding the Ukraine conflict, Russ Mould, investment director with AJ Bell, a British online investment platform, said one thing is already clear: inflation.

The Ukraine crisis "has supercharged the inflationary pressures already facing the globe, while at the same time blunting central banks' response, as they will be wary of being too aggressive on rates at a time of such uncertainty," Mould added.

Record inflation has brought major headaches to European economies. The EU statistical office Eurostat said Wednesday that driven by the high costs of energy, the eurozone's annual rate of inflation would reach 5.8 percent in February. And Britain's annual inflation reached a new high of 5.5 percent in January, breaking its near 30-year record, according to the UK Office for National Statistics.

Worse yet, the Ukraine crisis will add one percentage point to eurozone inflation this year, said Christopher Dembik, head of macro analysis from Danish investment bank Saxo Bank.

In Britain, fuel prices hit a new all-time high in February, British automotive services company RAC said, noting that it now costs 83.14 pounds (about 110 dollars) to fill a 55-liter family car, 3 pounds more than the start of the year and 15 pounds more than a year ago.

"The rising pump prices are entirely down to increasing wholesale fuel prices caused by the oil price" jumping by 10 dollars in February, said the company.

In the face of a double whammy, airlines are also under pressure. While the industry has to reroute flights because of airspace bans, it also spends significantly more on fuel when oil prices are surging, said Joshua Warner, an analyst at City Index. "This is set to feed through to higher prices for travellers."

Uncertainties ahead

"In the past, soaring energy prices have been a decisive factor in tipping economies into recession," said Saxo Bank analyst John Hardy. "Europe was arguably already headed for at least a short recession after the sustained higher power and electricity prices over this past winter."

Brent is widely expected to continue its march higher. "Oil seems to win either way at present," said Chris Beauchamp, an analyst from British trading provider IG. "Either the conflict continues and prices rise on fears of disruption, or it ends and prices rise as the global economy resumes its recovery and demand recovers."

Meanwhile, the forecasts diverged about where the oil prices would peak. Some analysts considered 120 dollars or even 125 dollars as the next major resistance hurdles, and some weighed the possibility of 200 dollars in the worst-case scenario.

"There is obviously plenty of uncertainty in the oil market at the moment," said Warren Patterson, head of commodities strategy with the ING Group, a Dutch financial services corporation, "and the only certainty is that forecasts will change as the Russia-Ukraine situation evolves."

Special Reports

Top