Crude oil prices are seeing a short term rally move in futures markets this week, across both Brent and West Texas Intermediate crudes, while remaining near the lowest levels this year. The gains come after supply disruptions due to an attack on a Russian pipeline, which reduced flows from Kazakhstan.
Meanwhile, sources in the energy market are saying that loading plans for February will not change despite a Russian official’s talk that damage to the pipeline – responsible for 1% of global supply – will harm the global market and American companies.
Seven Ukrainian drones were used in a raid against a major Russian pipeline owned by the Caspian Pipeline Consortium, which connects oil fields in Kazakhstan with terminals on the Black Sea coast. The drones destroyed a key pumping station on the pipeline.
The focus on the prospects of increasing global crude supplies is reducing the impact of this disruption however. A supply hike may be on the cards from the Organization of the Petroleum Exporting Countries and its ally Russia, who do not want to delay the scheduled date for raising production next April.
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Any agreement to have implications for oil prices
On the other hand there is the hope of the reaching an agreement to end the war in Ukraine, which could also have implications for oil prices on the downside.
Efforts to discuss a ceasefire agreement are accelerating with Russian and American officials meeting in the Kingdom of Saudi Arabia over the weekend. This meeting may also have discussed trade issues less publicly, including implications for Russian energy exports.
The outgoing positive signals from this meeting, whether regarding ceasefire or the development of trade relations between the two poles, may be a negative factor for oil prices, removing yet further justification for oil to trade above $70/bbl.
Bank of America says it expects that the reaching of an agreement between Russia and Ukraine may cause Brent crude prices to drop by $5 to $10 per barrel if Russian crude supplies are able to reach the markets more freely. Much will depend on exactly what sort of peace deal is brokered ad how this affects international sanctions on Russia.
These negotiations may take a long time or may even fail, which may reduce the downward pressure on crude prices. Failure of the negotiations may result in maintaining sanctions on Russian oil exports as well.
Further oil risks remain in Middle East
In addition, the Middle East may return to the forefront again with potential escalation between the United States and Israel on the one hand and Iran on the other. An official in the Iranian Revolutionary Guard confirmed at the weekend that the next attack on Israel will be on time. Previous mutual attacks between Iran and Israel temporarily caused crude prices to rise suddenly, as they exacerbated concerns about targeting Iranian oil facilities.
“I believe that the next potential round of escalation and the subsequent disruption in supplies will have a temporary and limited impact on prices,” said Samer Hasn, a commodities analyst with XS.com in Dubai. “On the one hand, I do not believe that Iran and its allies have the ability to expand their escalation to include oil interests in the region, especially under the Donald Trump administration, and on the other hand, the restrictions that will be imposed on Iranian oil exports may not have a significant impact on the market.”
The International Energy Agency said in its February report that sanctions on Russia and Iran will have a long-term impact, while the oil market has shown resilience in the face major challenges in the past.
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