At the start of the trading week, the European leaders agreed to pursue a partial embargo on Russian oil. Since Russia invaded Ukraine in February this year, everything changed in the way Europe is doing business with Russia – and in the way the central bank deals with rising inflation.
Inflation, because this is what hurts economies right now, is fueled by rising oil prices. Up to the Russia-Ukraine war, inflation was fueled by central banks and governments’ monetary and fiscal stimulus to counter the COVID-19 pandemic effects.
As such, the oil price jumped from negative territory and closed in 2021 at around $70/barrel. Such difference (from about negative $40/barrel to $70/barrel) translated into an uncontrolled rise in the prices of goods and services everywhere.
Moreover, lockdowns triggered supply chain bottlenecks as globalization took a hit. Therefore, inflation took yet another step higher.
And then the war started. By the time Russia effectively invaded Ukraine, rumors already existed of large concentrations of Russian troops at the Ukrainian border.
Oil prices moved higher in advance.
To the market participants, it became clear that oil would jump to new highs in the case of a conflict. The conflict started at the end of February, and oil jumped to over $120/barrel.
It has hovered above $100/barrel ever since. The world knows that Russia’s big export is in energy products, and the only way for Europe to counterattack is to slash its energy dependency on Russia.
It did so at the start of this week.
The embargo on Russian oil, while not absolute, paves the way to less Russian oil entering European markets. Before the Ukraine conflict, about 90% of the oil EU bought was from Russia.
Even with some exceptions for some countries that were made this week, what matters is that Russia’s exports to Europe will decline significantly.
So what does it mean for the price of oil?
Less oil on the market equals higher prices?
Oil is a commodity. As such, its price fluctuates based on the supply and demand imbalances.
So unless Russia finds a substitute for the oil sold in Europe, the oil price should remain bid. That is due to sanctions on trading Russian oil imposed by Western nations.
Why do higher oil prices matter? For once, they feed higher inflation.
Take the Euro area annual inflation chart from above. It shows that energy is responsible for most of the increase in inflation, which reached its highest level ever in May 2022 in Europe.
To sum up, oil prices remain bid while above the pivotal $95-$100/barrel area. Moreover, the current geopolitical developments do not point to lower oil prices, further supporting the bullish case.
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Author: Mircea Vasiu
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