Why oil falls 40 dollars in a matter of days if the war between Ukraine and Russia does not end

In a matter of days, oil has gone from touching its historical highs to losing 100 dollars per barrel, falling to the levels it was at before the Russian invasion of Ukraine was triggered. This drop in crude oil has occurred despite the worsening of the war and the sanctions, which continue to putting global crude oil supply under pressure (Russia is the second largest exporter in the world), as the International Energy Agency warned on Wednesday. What has happened in the markets and the economy for oil to lose 40 dollars in a matter of days?

On March 7, the future of Brent oil for April reached 139 dollars per barrel. The market was discounting the imposition of sanctions by all Western countries against Russian crude (7.8 million barrels per day of refined products), which would leave global supply in a very tense situation to supply demand.

Oil soared and forecasts began to place the price of crude oil above 180 dollars short term. Now the situation has taken a significant turn, at least temporarily, which will bring relief to the pockets of consumers and the costs of companies. Brent crude reached $97 on Tuesday and today is trading at $102 per barrel, high levels, but still far from record highs.

decaffeinated sanctions

Finally, only the United States and the United Kingdom have announced official sanctions (Europe depends too much on Russian energy to apply this type of sanctions), leaving the movement in a more watered-down blow than expected, since imports of Russian crude in The US and UK are relatively small.

From the International Energy Agency they warn in their monthly report of the danger of this situation in the coming months. Although some price easing is now taking place due to the factors outlined below “we see the potential for 3 million barrels per day (mbd) of Russian oil supply to disappear from April, but losses could increase if restrictions or public condemnation increase”.

So far the impact has been limited. The US ‘only’ imports about 400,000 barrels of Russian crude per day on average. This amount can be easily and quickly compensated, allowing countries that are currently producing below their potential to recover all their oil capacity. To do this, the US must lift sanctions and reach new agreements with countries that were previously a problem and can now be a solution.

Venezuela and Iran

Pulling pragmatism, the US quickly began negotiating with Venezuela (it is also dealing with sanctions on its oil exports) to substitute Russian oil. Venezuela produces very heavy and low-quality oil (it is expensive to refine), but it is the country with the most crude oil reserves in the world and at current prices that heavy oil is attractive. If Venezuela modernizes its stagnant oil industry, it has the capacity to produce up to 1.2 million more barrels per day.

To the above must be added the possible return of Iran to the international oil markets, also through the lifting of sanctions imposed under the Trump Administration in 2018. Iran can produce up to 4.5 million barrels per day of crude, compared to the 2.5 or 3 that it is currently producing ‘officially’. Right now, this would be a major relief for the markets. From Natixis they assure that the agreement between Tehran and Washington is imminent, but the truth is that this rumor has been flying over the markets for months and has not materialized.

New wave of covid and oil

Warren Patterson and Wenyu Yao, ING economists specializing in raw materials, point out in a note that “for now, the market seems to have focused on two factors. The first is the covid situation in China. Although Shenzhen had already been in confinement two days, we’re starting to see tighter restrictions in other cities.” Covid cases in China are skyrocketing, which could significantly reduce mobility in the coming days. If the Chinese stop taking their cars and doing their daily chores, the Asian giant’s demand for oil could suffer.

From Julius Baer they explain in a note that “the massive sale of oil continues and the risk premium seems to be rapidly evaporating from prices, although the tensions and uncertainties surrounding the war in Ukraine remain high. Although, the prospects for demand China’s oil prices have softened with the new outbreaks of covid, while the business of the fracking In the US production is starting to increase, the big swings in prices seem to be more of a sign of extreme nervousness.”

Right now “We are witnessing a price crisis rather than a supply crisis. Beyond the short-term uncertainty, we are confident that the rise in oil prices will follow more or less well-known patterns. Such sharp moves up generally follow moves down in weeks and months, not years,” Juluis Baer experts say.