Early last week, oil prices began approaching their highest level since 2008, generating anxiety and concern all around.
Prices surged and the markets tightened further as the United States and its allies, including the United Kingdom, moved rapidly to ban or at least limit crude oil imports from Russia.
And European gasoline prices set historic records. Rising prices created havoc for everyday gas consumers.
The scenario led many to believe oil markets would continue surging until the Ukraine issue is resolved and Russian crude begins flowing back into the markets.
Given the geopolitical scenario, the return of Russian supplies seemed improbable, at least in the shorter term.
Oil prices could even hit US$240 a barrel this summer, Norwegian energy consultancy Rystad Energy warned.
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But then, a few other developments impacted the markets.
When the United Arab Emirates, a country with spare oil capacity, finally called on the Organization of Petroleum Exporting Countries (OPEC) to boost oil output faster, market sentiments began changing.
“We favour production increases and will be encouraging the OPEC to consider higher production levels,” the influential U.A.E. ambassador in Washington, Yousef Al Otaiba, said in a tweeted statement.
But even before the tweet – when the International Energy Agency said oil-consuming countries could tap their reserves further to compensate for the disruption to Russian supplies – prices began cooling. “If there’s a need, if our governments decide so, we can bring more oil to the markets, as one part of the response,” said IEA chief Faith Birol.
This change was greatly aided by Ukrainian President Volodymyr Zelensky’s’ willingness to consider compromises to end the war with Russia.
So on Wednesday, Brent crude dropped more than 17 per cent, to nearly US$105 a barrel, the biggest plunge in crude prices since the early COVID-19 pandemic days nearly two years ago. However, by the end of the week, the markets pared some of these losses after posting their steepest weekly decline since November.
Brent crude futures rose US$3.34, or 3.1 per cent, on Friday, settling at US$112.67 a barrel after hitting a session low of US$107.13. U.S. West Texas Intermediate (WTI) crude futures rose US$3.31, or 3.1 per cent, to settle at US$109.33 a barrel, off the session low of US$104.48.
In the meantime, Russia began flexing its muscles, making the markets realize that it’s difficult for the world to stay away from Russian energy, at least right now.
With U.S. President Joe Biden and allies moving rapidly to impede the flow of crude from Russia, the Russians threatened to shut off the main gas pipeline to Germany. Russian Deputy Prime Minister Alexander Novak said a “rejection of Russian oil would lead to catastrophic consequences for the global market,” causing prices to more than double to US$300 a barrel.
He added that Germany’s decision last month to freeze certification of Nord Stream 2, a new natural gas pipeline connecting the two countries, could carry more significant ramifications.
“We have every right to take a matching decision and impose an embargo on gas pumping through the (existing) Nord Stream 1 gas pipeline,” he said. The European Union gets about 40 per cent of its gas and 30 per cent of its oil from Russia, and there are no easy substitutes if supplies are disrupted.
Germany, Europe’s industrial powerhouse, finally conceded its limitations on the issue, seeking to put the brakes on any further sanctioning of the Russian energy sector. In addition to counting on Russia for a third of its imported oil, Germany relies on Russia for more than half of its total gas supply.
On March 7, German Chancellor Olaf Scholz issued a statement describing Russian oil and gas as “essential” to European energy security. “At the moment, Europe’s supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way,” than by importing from Russia, the statement read. “It is therefore of essential importance for the provision of public services and the daily lives of our citizens.”
German Foreign Minister Annalena Baerbock emphasized on Tuesday that her country would “not be able to move” without Russian oil imports. “A third of our oil imports come from Russia,” Baerbock said. “If we stopped these straight away, then tomorrow we would not be able to move in Germany anymore.”
The energy chessboard is spread out and interesting moves are being made. But pushing Russia out of the global energy equation seems virtually impossible at this stage.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.
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