The Rising Crude Oil Prices: Russo-Ukrainian Crisis and The Energy Market

Robin Zhu, Senior US Correspondent

12.00am EST, January 31, 2022

When most investors expect the consumption level to go back to the pre-COVID level in later 2022, there is a huge change in the crude oil market. Due to the disequilibrium between supply and demand, the oil prices have risen sharply over the past two months. Although many OPEC (Organization of the Petroleum Exporting Countries) members have increased their amount of production, in comparison to the amount they produced at the beginning of the pandemic, the crude oil market still faced a challenge from Russia, the major supplier of natural gases in Europe. Based on the market data, Brent Crude Oil Price has surged by about 39 percent, while West Texas Intermediate (WTI) has risen more than 42 percent from its lowest point in December.

With current crude oil price over $88 per barrel for the first time since 2014, it’s expected that there will be many speculators in the market, who strategically buy in crude oils and resell them as prices go up. While there’s normally a pullback after an excessive rise in the market, some variables can create more volatilities and make the situation more complicated. The recent crisis in the Eastern Europe, stemming from the growing likelihood of a Russian invasion of Ukraine, can contribute to the rising crude oil prices. While Russia has amassed more than 120,000 soldiers and equipped them on the border, it denies that it intends to launch an invasion, but NATO (The North Atlantic Treaty Organization) and the United States believe President Putin could order an attack quickly within weeks.

A military escalation in the region could lead to a serious disruption to energy supplies. If the NATO imposes financial restrictions on Russia, the world's second-largest oil producer and Europe's major gas supplier, consequently, Russia would cut the energy supplies in Europe by stopping exporting resources, which would raise the crude oil prices to an even larger extent.

The European Union (EU) relies on Russia for about 35 percent of its natural gas, so any disruption, especially during winter when the market demand for natural gases is so high, can trigger a severe result in energy prices. For example, anxiety about natural gas prices could create a momentum of seeking for fuel substitution, which would boost oil demand and push the market further into shortages. Although indices related to crude oils and energies may rise, it’s not a good market signal for the global economy to recover from the pandemic.

In summary, crude oil prices are predicted to continue rising. In the short term, oil prices are heated due to geopolitical tensions in the Eastern Europe, which could possibly continue to intensify. However, the buying momentum in the market is believed to be speculative and temporary, and it could slow down as the risk premium declines. If there is an actual military conflict, or, if Russia invades Ukraine, then it will lead to the worst scenario, in which a surge in crude oil prices is unavoidable. President Putin is expected to make a decision soon, and investors should pay close attention to the geopolitical situation, in order not to fail in the energy market.