Prices of oil and natural gas have jumped as a result of the conflict between Russia and Ukraine. While Russia is a minor player in the global economy, it is a hub and global exporter of energy products like crude oil and natural gas.
The price of Brent crude reached an intraday high of $99.50 a barrel on Tuesday. The jump in energy prices comes as a result of the conflict between Russia and Ukraine.
Russia is a global exporter of energy but due to the conflict and the sanctions that are following, there are fears of a possible scarcity of crude oil and natural gas. The spot prices of crude, along with the prices of future contracts, are going up despite the backwardation in the energy market.
“If there is a supply disruption in Russia or elsewhere, then prices could move very quickly as we have seen in the past,” says Ryan Fitzmaurice, commodity strategist at Rabobank told Barrons.
What about relief from US shale oil and OPEC?
It is expected that the Organisation of the Petroleum Exporting Countries (OPEC) Group may increase its production of oil to capitalise on the windfall. But the group of 13 countries, which represents 44 percent of global oil production and 81.5 percent of the world's ‘proven’ oil reserves, has stated that it has very little room to increase its oil production. While Saudi Arabia can increase its production -- it is currently producing 10 million barrels a day against its quota of 12 million barrels a day -- it clarified it won’t be increasing its production at the behest of the US anytime soon.
Some of the reticence in increasing production may be due to the recent OPEC report that highlighted that there was already a potential global surplus of 1.4 million barrels a day in the first quarter of the year, stoking fears of a future supply glut.
Similarly, US shale oil companies are also exercising financial discipline by not investing in increasing their production capacity. Additional supply chain issues for key components, computers, labour shortages and inflationary pressures also add impetus to keep production levels flat while raking in cash to please the investors.
What does it mean for India?
For India, the rise in prices of crude oil may cause another round of hikes in fuel prices in the short term. The price of domestic natural gas may also take a large jump, as the price is set in April according to international prices between January and December 2021.
With the shutdown of Nord Stream 2, natural gas prices are expected to soar in the coming days. India is importing 45.3 percent of its demand for natural gas, and the increase in price is expected to hit India hard as well.
India already saw a marked increase in fuel prices due to a demand shock after the global economy recovered much faster than expected.
But severely high fuel prices may also hurt India’s growth and recovery after two years of the COVID-19 pandemic, further complicating matters for the Reserve Bank of India.