Last time we talked about the cracks that are appearing in the global economy. One of the reasons for this is the rampant inflation that doesn’t seem to go away any time soon hence it appears to be “sticky” as compared to “flexible” (but that is another debate). Within inflation, one of the most prominent factor that is contributing to this spike is rising energy costs and any such mention will not be complete if we do not discuss the oil market that is manifesting the collective confusion of traders, observers and policy-makers.

The ebb and flow of oil prices has been such that I personally think markets have become untradeable and non-navigable (as I mention in these comments for Capital.com).

However, the recent SPR release (of 180 million in total over time) is tamed the fears as prices stabilized for a few days. But recent developments in Russia-Ukraine war has led to first weekly gain for oil in April as prices rose almost 2 percent yesterday (on Friday, 15th April, 2022). Finland and Sweden has shared their inclination to join NATO which introduces a completely new dimension to the ongoing conflict with its own complexities. Russia in turn has warned, as it always has, that if this happens the country will deploy hypersonic missiles in order to strengthen its naval, land and air defenses. Now I am not going to debate whether this is an unwarranted and highly untimely step in the midst of a war but clearly this will not help to ease the matter in any way, shape or form.

I am expecting more turmoil and aggression from both sides and markets will react. It may seem that oil prices have already become or becoming desensitized (using in terms of pricing) to this current conflict but the recent short spike in prices suggest that this might not be the case if the status quo changes.

We might see oil once again rising or even surpassing its 2008 levels ($145) and talks of a $200 oil might start anew, afresh. Also, this will be exacerbated by other developments such as EU, once again, considering to ban Russian oil. I was on TRT World the other day and spoke about what alternatives does the EU have in terms of oil. Innterms of alternatives EU can look to OPEC+, Algeria, Libya. However, OPEC+ is under a self imposed production cut quota system and recent events have made it obvious that none of them are willing to increase production. Furthermore, much of the spare capacity within OPEC+ comes from Russia which is the third largest producer of oil. According to one estimate, out of the 5 mbpd oil that Russia exports to the EU, 2 mbpd can be replaced by OPEC+ in case they increase their production to its maximum (which sounds good in theory but is highly difficult to imagine in reality). Secondly, Libya’s oil infrastructure has been under attack and/or not working sufficiently to provide any significant contribution to EU (this is because of civil strifes in Libya). Venezuela can add 100,000 bpd at most but that will also require time as its sanctioned-smitten industry will restart (if it did at all) after much time. Same is the case with Iran. Albeit, Iran has the capacity to move crude to the markets quickest in all of these options the fact that the successful negotiation of Iran deal remains a big question (and hurdle as well).

EU has banned coal from Russia which will require the former to arrange replacement for 40 million tonnes of coal. In terms of money, EU pays roughly $21 bn to Russia for coal per day however, when compared to oil for which EU pays $928 million on daily basis, it becomes a different issue altogether.

I personally do not think that EU will go ahead with a ban on Russian oil as the cost for doing that is huge especially for the common man but acceptance is growing amongst people for such a step. If that happens, oil markets will go off the charts triggering a world wide recession as inflation will wreak havoc with countries especially from the developing world (and it already is as I write this).

Tough times ahead!