Oil price at multi-year high: how high can the oil price go?

Putin’s war fuels oil price explosion of historic proportions
l trade with Russia came to a standstill
Global energy security at risk

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The price of oil is at a multi-year high: the price for a barrel (159 liters) of the North Sea resort of Brent was last listed at over 120 US dollars in April 2012, before the price slump of 2014/2015 ushered in a period of relatively cheap oil for several years. This is now finally over. In the euro area, the rise in the price of oil is being exacerbated by the currently strong US dollar, since trading in oil is settled in US dollars.

The current oil price explosion brings back memories of the 1973 oil crisis

After the Brent crude price crashed below US$25 per barrel during the first wave of the COVID-19 pandemic in March 2020, the oil price rose steadily due to the subsequent economic recovery. Putin’s attack on Ukraine on February 24 caused the already high oil price to explode: Within a few trading days, the price of a barrel of Brent crude rose by 28 percent from US$94 to as much as US$120 – a rise historic proportions, which brings back unpleasant memories of the 1973 oil crisis, especially among older drivers.

Sanctions bring Russian oil trade to a standstill

The rapid increase in oil prices is directly related to Putin’s war of aggression against Ukraine. Although the western states have not yet imposed any official sanctions against Russian oil and gas, traders actually hardly buy any Russian oil anymore – not least because of concerns about sanctions from the USA and its allies. In the long term, market participants even fear a complete supply failure of Russian oil, either because of a western embargo or because of a Russian supply stop. This would have dramatic implications: in 2020, Russia was the second largest oil producer in the world, contributing 12.6 percent to global supply; almost half of russian production is destined for export. If international oil trade with Russia actually came to a standstill, this would severely reduce the global supply of oil. Russian oil companies such as LUKOIL and Rosneft in particular are already finding almost no foreign buyers for their oil; the shares of these Russian oil companies can currently not be traded in either Moscow or London.

Record high is approaching

As a result of the sanctions against Russia, the record high of the oil price is now in sight: Oil reached its highest level to date on July 11, 2008, when Brent-Rohl was quoted at a high of 147.40 US dollars. According to the estimates of various analysts, this record high could well be surpassed this year. In an interview with WirtschaftsWoche, Commerzbank analyst Carsten Fritsch predicted that “there is no end to price increases in sight” due to the lack of buyers of Russian oil. Geopolitical tensions are causing supply to contract sharply while demand remains high. However, given the volatile market situation, a serious forecast cannot be given. It will depend on whether the possible loss of Russian oil can be compensated for by increased exports from other countries.

Global energy security at risk

The International Energy Agency (IEA) therefore sees global energy security at risk, especially since the 23 members of the Organization of the Petroleum Exporting Countries (OPEC+), to which Russia also belongs, are refusing, according to Reuters reports, to increase oil production by more than the previously agreed 400,000 increase barrels per day. In order to curb the global supply shortage, the USA and some allied states have therefore released their strategic oil reserves. However, should international oil trade with Russia actually collapse once and for all, these measures are unlikely to be sufficient to counteract a reduction in the long bid, at least in the medium term. The associated high oil price, in turn, threatens to exacerbate runaway inflation and could slow down the global economic recovery after the Corona crisis.

The rise in the price of oil has continued unabated this week. Brent-Rohl was above $128 a barrel on Tuesday.

Editorial office finanzen.net

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