Oil & Gas Price Pullback Amidst Tense Ease Off in Ukraine

Edited by Vani Rao

Speculations over supply disruptions drag down oil futures

Oil futures closed nearly 2% lower on Tuesday, 4 March 2014, pulling back from the more than five-month high they made a day earlier. Oil futures closed lower following concerns over crude-supply disruptions with the ongoing tensions between Russia and Ukraine.

Source: Bloomberg
Source: Bloomberg

As shown above, crude oil for April delivery fell $1.59, or 1.5%, to settle at $103.33 a barrel on the New York Mercantile Exchange. Meanwhile, on the ICE Futures Exchange, Brent crude for the same month lost $1.90, or 1.7%, to end at $109.30 a barrel.

bb2Elsewhere in the energy complex on Tuesday, natural gas for April delivery jumped 17.5 cents, or 3.9%, to $4.67 per million British Thermal Units, rebounding after Monday’s 2.5% decline as forecasts for cold weather continued.

Gas and oil prices have risen amid fears that the Ukraine crisis could have a damaging effect on one of Europe’s main energy supply routes. Traders are worried about the stability of supplies from Russia, which provides a quarter of Europe’s natural gas, half of it through Ukraine.

Russian Reliance?

Russia is Europe’s biggest supplier of natural gas; however, Europe has gradually reducing its dependence on Russia for the last decade. It now imports less than 30% of its natural gas from Russia, compared with 45% in 2003, according to European Union statistics.

Europe is also less reliant on the Ukraine link; with improved gas infrastructure in place, supplies could now go via alternative routes in the event of any disruption.

bb3There are also doubts that Russia could disrupt or cut part of its gas supply to Europe, which is worth almost $100 million (£60 million) a day. Analysts estimate that the gas supply to Europe accounts for about 3% of the Russian economic output.

Russia’s economy registered disappointing growth of 1.3% last year and its central bank has lowered its own forecasts, anticipating growth of below 2% until at least 2016. Hence, curtailing the gas supply to Europe does not seem to be a feasible option for Russia. While Russia needs the income from its largest export market, Europe needs the gas supply, although the timing makes it less vulnerable than it might be. This is mainly because a milder winter is coming to an end and Europe currently has enough gas stocks.

Alternative Fuels on a High

Concerns about one of Europe’s key gas supply routes have had a domino effect on other commodities, especially oil, as demand for alternative fuels increased. Alternative fuels have been witnessing a huge demand due to concerns about oil supplies from Russia, one of the world’s largest oil producers, as well as the impact of any disruption in the gas market.

Natural gas and crude oil are both state-run industries in Russia. If the crisis continues to escalate, Russian President Vladimir Putin could respond to any actions by the international community by cutting off Russia’s oil and natural gas exports to the European Union.

Although the US does not rely upon Russia for crude oil (less than 5% of US imports are from Russia) or natural gas (no imports), its prices are set based on the supply-demand dynamics in the global market. Any supply shocks in Europe that send prices higher will have ripple effects that raise gas prices in the US. Moreover, airlines and other industries dependent on oil would be hit the hardest by the price hikes and any sustained increase would take a bite out of consumers’ disposable income, hurting the entire economy.

In 2012, 84% of Russia’s oil exports and nearly 80% of the natural gas exports went to the European Union. Closing the pipelines to most of Europe would leave a massive hole in the country’s budget. That may be something Putin deems necessary, but he won’t take such steps lightly

Lastly, any asset freezes or economic sanctions on Russia would also have a more significant impact on the European and American economies, especially if Putin responds in kind. However, given the volatility of the entire situation, it’s tough to precisely predict how any of these events will affect the global economy.

Energy is a battleground where nobody would like to fight.

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