• Saturday, June 15, 2024
businessday logo


EXPLAINER: How oil markets work and disruption from boycott of Russian crude

Africa’s biggest oil producer struggles despite price bonanza

The growing chaos in the energy market heightened on Wednesday after sanctions against Russia caused the pull-out of major Western energy companies from the country and traders shunning Russian oil cargos.

Brent, the gauge for Nigeria’s crude oil, reached a peak of $118 per barrel Thursday, one week after Moscow invaded Ukraine.

Although the United States has not yet targeted Russian oil sales as part of its sweeping economic sanctions following the invasion, US traders have already acted to put such imports on hold, disrupting energy markets.

Energy is a critical part of the Russian economy; oil and natural gas sales contributed over one-third of Russia’s budget last year.

How the energy market works

As with any market, the crude oil market is driven by the opposing forces of supply and demand. When supply outweighs demand, those in possession of the oil have an excess of it, and so are likely to let it go at cheaper prices.

Contrastingly, when there is not enough supply to satisfy demand, prices will spike as consumers clamour to obtain it and the owners can basically set whatever price they see fit.

However, it’s not that simple.

Firstly, there are a variety of factors that dictate how big both supply and demand are. As aforementioned, oil reserves are running out; so inevitably, prices will rise as the supply ebbs away.

Also, politics can play a part in the price of crude oil. For example, the Organization of the Petroleum Exporting Countries (OPEC) can wreak havoc on the world’s economy and energy capabilities, as they showed in 1973.

Speculation leads to distortion

Similarly, speculators who invest in the future of such commodities as crude oil can have a significant effect on its price as well. Crude oil speculation is much like other forms of investment – the speculators are basically “betting” on whether they believe the price of the commodity will
rise in the future.

If a speculator buys oil reserves at an artificially-inflated price (i.e. higher than its current market worth), this will cause the producers to desist trading with other buyers, in the hopes of selling their
oil at a similar price in the future. In this manner, the prices can be artificially driven up.

Therefore, there are a variety of factors that go into determining the fluctuations in the prices of crude oil, and as a direct result, of petrol and diesel.

Read also: Sanctions on Russia: Everything you should know

How Russia comes in

Energy is a critical part of the Russian economy; oil and natural gas sales contributed over one-third of Russia’s budget last year.

Russia is the world’s third-biggest oil producer and second-biggest producer of natural gas, ranking among the top energy suppliers to the US and China, the world’s top two economies.

In 2020, Russia provided seven percent of the US petroleum and crude oil imports, making it the country’s third-biggest supplier alongside Saudi Arabia.

In television interviews monitored by BusinessDay, US spokeswoman Jen Psaki said while Washington was still considering hitting Moscow’s vast energy sector over Russia’s invasion of
neighbouring Ukraine, the impact on global oil markets and US energy prices were a key factor.

“We’re considering it. It’s very much on the table, but we need to weigh what all of the impacts will be,” she added.

Energy prices had already been soaring in recent months amid a confluence of factors, including the pandemic, limited supply and growing tensions between Russia and Ukraine.

President Joe Biden’s administration has warned it could block Russian oil if Moscow continues its aggression against Kyiv. However, Psaki said the White House is considering how that could rattle the markets.

“That’s something we heavily weigh,” she told CNN separately.

In January, a group of economists at JPMorgan Chase & Co. predicted that a surge to $150 a barrel would reduce global economic growth by more than three quarters, to less than 1 percent in the first half of the year.