How is Oil affected by The Promise of a Ukraine Ceasefire?
Russia's invasion of Ukraine in 2022 did not just create a battleground in Eastern Europe. Instead, it disrupted international supply chains and mechanisms of energy power. There was a rise in oil prices as energy markets plummeted in panic and tried to adjust to rising demand. After all, Russia is one of the primary purveyors of oil, and Europe one of its significant marketplaces, sustained access through oil pipelines transiting through Ukraine, making it a pivotal transit country.
An invasion creates uncertainty, lowers supply, and raises demand. At the same time, as world leaders try to broker peace, oil markets rely on the perception that such peace can help the average person.
Can peace negotiations help oil markets for everyday consumers, seeing their price per gallon increase? An anticipated peace process may increase supply and lower prices; what remains to be seen is follow-through, additional geopolitical ramifications, and the master economic plan.
Historical Context and Current Impact
Oil pricing is affected by war and international relations. Note the following: In 1973, the Arab Oil Embargo occurred when Arab nations refused to sell oil to any country supporting Israel in the Yom Kippur War.
As such, oil prices skyrocketed by 400%, and people saw shortages and a subsequent recession. The 1990 Gulf War, as panic focused on what would happen to Iraq's and Kuwait's oil (Kuwait remained), induced another spike in pricing.
Current sanctions against Iran suggest limited ability to ship oil through international waterways, meaning less oil supply to the international market. Therefore, any news suggesting less supply of oil increases prices, any news suggesting stabilization of supply decreases prices.
The historical pattern shows that a ceasefire in Ukraine sooner rather than later will assist the international market vulnerable to fluctuations in oil pricing and will affect crude oil investing. Also, oil markets fluctuated since the war in Ukraine. Following the Russian invasion in Ukraine, Brent crude oil prices hovered above $100 per barrel for the first time in over five years in the early months of 2022 and remained high due to fears of production limitations. Oil markets fluctuate with speculative trading, oil inventories, and other factors in the pipeline.
Europe attempts to get oil from any other country except Russia, which means turning to proxy regions in the Middle East or Africa, and trafficked regions that increase transfer costs through the physical shipping of crude oil from one location to another over time.
Potential Effects and Skepticism
A Ukraine ceasefire could be good for oil markets theoretically. A new supply and operating situation afterward could benefit the oil market. Ukrainian pipelines can redirect Russian oil, which may create a more abundant supply in global markets.
Yet, more supply usually means lower prices. Fewer sanctions mean more supply, as Russian oil can come back into play. But experts aren't convinced. Goldman Sachs reassured its investors that a ceasefire would do nothing to change access to Russian oil because of logistical constraints and buyer aversion that will occur, meaning, in the short term, an increase in supply down the line may not happen.
There's evidence it's happened before, in the past, if ceasefires were ever brought up, pricing lowered, albeit temporarily, until ceasefires were held and stabilization occurred. This suggests that oil markets can get back to normal, but instead of decreased geopolitical factoring, awareness of the war in Ukraine, inflation, and demand increased economic factoring will reign over markets instead.
However, the ceasefire is complicated as well. International negotiators from Turkey and the United Nations are already issuing ceasefire language, and a meeting in November is in the works. But in 2023, Russia and Ukraine do not trust each other, and the failed Minsk accords from years past render Round Two that much more tense.
Anything beyond a ceasefire, sanctions, negotiations over territory complicates matters even further. A ceasefire means nothing to oil traders. When there is a cease on day one and day two, they do not change their holdings.
Is there going to be a ceasefire between Ukraine and Russia, because they're negotiating, and the fact that they're negotiating is a step in the right direction.
Oil prices on the New York Mercantile Exchange have dropped, meaning investors are banking on stabilization of supply and return to normal. Yet, if negotiations fail, increased expectations of demand will raise oil prices even higher. Everything rests on whether or not the negotiations go through for the stability of the international oil market.
Conclusion
Ever wonder why gas prices are suddenly so high? The answer is the Russia-Ukraine War. Ukraine is practically an oil pipeline from Russia to Europe. With the Russian invasion in 2022, it's as if there's a blockade in the middle of the turnpike.
Supply dries up and in an instant, like the gas prices of 1973 when Arab nations put an oil embargo on countries supporting Israel and prices skyrocketed by four times, gas prices go through the roof. There are tentative ceasefire negotiations which would determine the turnpike routes and prevent drastic pricing increases.
But economists note that a return is unlikely. The upstream connection between the countries suggests that making the reinstatement from a severing was more than just guns up in the air, so when guns go down, that doesn't mean trust will be restored.
If a ceasefire is established, reinstating the supply or trying to figure out if it's reinstated or burnt, will be difficult. Oil traders need more than a spoken word, reiterate that trust is lost, and one little mistake puts them in a vulnerable situation for loss in the future.
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