Crude will continue to flare in short-run due to geopolitical tensions

Heightened geopolitical risk continues to threaten the global energy market, creating conditions for increased volatility at least in the short run. Brent rates continue to stay at elevated levels testing $90 a barrel from time to time. WTI is not far behind.

Although the OPEC+ meet on Tuesday decided to raise oil production by the planned 400,000 barrels a day in March, too, and to unwind the remaining production cuts by the end of the year is widely seen as a welcome step, it is unlikely to change the oil market price scenario markedly in the short run given the ongoing geopolitical tensions involving Russia and Ukraine.

But OPEC+ decision comes as no surprise. In its combined wisdom, the cartel believes that the world oil market will get into a surplus this year. Importantly, the cartel members have not been able to fully implement the existing production hikes. Output in some of the member countries has lagged behind agreed levels adding to perceived supply tightness.

Of course, it is possible for Saudi Arabia to step up its production given its spare capacity; but the oil major is exercising caution against any unexpected supply outages that can potentially inflame the oil market.

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Output hikes

Producers’ representatives and most market observers are convinced the current price situation is the result of the ongoing geopolitical tension rather than any marked changes in supply-demand fundamentals. If anything, hike in output is most unlikely to exert any significant price pressure. It is widely acknowledged that there is currently a $10 a barrel ‘risk premium’ to the oil market prices.

Members of the oil cartel are facing a tricky situation. Some producers continue to underperform as they are unable to raise output as per agreed terms. At the same time, there is tremendous incentive to produce and supply more given the current attractive prices.

Europe continues to be on tenterhooks. Natural gas supplies from Russia may get disrupted if tensions escalate. So, there is search for other sources of supply. If the geopolitical situation worsens, the entire energy complex would be strained and large consumers will bear the brunt.

At the same time, belief is gaining ground that the world cannot afford a war at this point in time. Countries around the world would put pressure on Russia to de-escalate the tensions. In the event, the energy market is likely to show strong correction from the current levels. The risk premium will disappear.

Price outlook

Assuming geopolitical tensions abate, the global oil market will get into surplus by the middle of this year. That would result in downward price pressure which would be exacerbated by the exit of speculative funds. Undoubtedly, one can rule out any collapse in crude oil prices in 2022. By the end of the year, oil may trade in the $70-75 range. Major importing countries such as India have to be on guard.

The author is a policy commentator and commodities market specialist. Views are personal.

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