US Brent crude traded more than $130 a barrel (bbl) when the US government announced a ban on Russian oil and gas imports as punishment for the invasion of Ukraine nearly two weeks ago.
Economic planners are now faced with the unthinkable: what if the oil price soars to $200 or even $300/barrel?
Germany’s Dax is down more than 21% since early 2022 and was in free fall on Monday given Germany’s heavy reliance on Russian oil and gas. Germany is acting cautiously, as any hostile move could lead to Russia turning off gas taps — something Russian military planners seem to have envisioned as a possibility.
On Monday, nickel trading on the London Metal Exchange was suspended after prices crossed $100,000 a tonne “in the mother of all short squeezes,” writes Craig Erlam, market analyst at forex firm Oanda.
“Further market turbulence in the goods space could easily follow.”
US President Joe Biden said other countries may not be able to join the US ban, though the UK said it would phase out Russia’s oil and related products by the end of 2022, while the European Union expects to reduce its dependence on Russian gas by two-thirds by the end of the year.
The fact that the US passed a unilateral ban on Russian oil explains why oil prices are only 5% to 6% higher on Monday instead of 15% to 20%, Erlam says.
The current ‘meltdown’ in oil prices may not last long, as new production will be rushed to market. The US and the International Energy Agency said it would release 60 million barrels of emergency oil, equivalent to 4% of member states’ stocks.
Terence Hove, market analyst at Exness Africa, says Europe is much more vulnerable than the US to economic catastrophes due to higher oil prices, and their economies may be spiraling downward.
Brent traded at nearly $138 a barrel on Monday [US sanctions against Russia] further exacerbate the possibility of crude at or above $150 a barrel, which will be felt by SA consumers. This war has become everyone’s situation, one way or another.”
The US ban includes petroleum products, liquefied natural gas (LNG) and coal, as well as new US investment in the Russian energy sector.
In 2021, the US only imported 3.3% of its crude oil from Russia, so the ban will have minimal impact on US inventories.
Chance for SA
SA Oil & Gas Association spokesman Craig Morkel says there is a chance for SA to become energy independent and create hundreds of thousands of jobs within ten years, provided we act urgently. SA can also become an oil price maker rather than a buyer.
“We need to accelerate the Upstream Petroleum Resources Development Bill because that could determine a portion of production for local consumption, which could then be priced locally and distract ourselves from the international pricing market.”
What Russia cannot sell to Europe, China will buy.
Several Russian banks that were cut off from the global SWIFT payment system have been able to switch to China’s UnionPay, a competitor of Visa and Mastercard.
UnionPay operates in approximately 180 countries around the world, enabling Russian banking customers to purchase goods worldwide. China is also developing an alternative to SWIFT that it is expected to make available to Russia.
Rystad Energy senior analyst Kaushal Ramesh says there was a noticeable increase of about 4% in daily oil flow from Russia to Europe, offset by a small drop in flow from Norway.
“Russia has threatened to retaliate against Western sanctions by cutting flows through Nord Stream 1, a risk that is at least partially priced into the market at the moment.
“Germany, on the other hand, remains reluctant to ban Russian energy exports, which the markets could read as a bearish signal.”
On the LNG front, Russian and non-Russian linked ships carrying cargo of Russian origin could be diverted to Belgium, France and the Netherlands if rejected in the UK or Lithuania, suggesting these volumes could still enter the European gas network. says Ramesh.
“Short-term temperature forecasts have been revised upwards and the prospects for wind energy have improved significantly.”
The sharp rise in the oil price has panicked the financial markets.
The S&P 500 is down more than 12% since the start of the year, while the JSE Top 40 has remained stable over the same period.
This means there will be a petrol price per liter of R20 and above for the foreseeable future, but there is a broader impact on food and other prices – all of which depend on fuel for transport.