Oil rises on supply risks
Rising global instability has pushed oil prices to a five-month high. Brent crude hit $89 a barrel on Tuesday, a day after a suspected Israeli airstrike on Iran’s embassy in Syria, says Anna Cooban on CNN. The attack “raises the spectre that the war between Israel and Hamas in Gaza will spill over” into a wider regional conflict.
“The war in Gaza has not significantly disrupted oil supply so far,” says Bill Weatherburn of Capital Economics. However, “markets are clearly worried that an escalation in the conflict could come to involve the major oil-producing countries in the region”.
Meanwhile, a concerted campaign of Ukrainian drone attacks on Russian oil hubs and refineries is jeopardising Russian energy output, says Isabel van Brugen in Newsweek. The strikes have taken an estimated 14% of Russia’s national refining capacity offline, forcing Moscow to ban exports of petrol and diesel and import fuel from neighbouring Belarus to fill the gap. Energy exports account for 30% of the Russian state’s budget revenues and “are crucial” for funding the country’s war machine.
“We are going to focus on where it hits [Russia] the hardest, and that’s financial resources,” Francisco SerraMartins of Ukrainian drone firm Terminal Autonomy tells Bloomberg. “Russia is a gas station with an army, and we intend on destroying that gas station.”
Opec+ caps supply
While Russia is still exporting crude oil, this is being limited as part of a deal with Opec+. The oil producers’ group, which covers around 40% of global production, last year agreed to cut its collective output by 2.2 million barrels per day in a bid to keep prices buoyant.
The supply curbs are currently scheduled to end in June, but an extension of Opec’s restrictions to the end of the year could bring $100 a barrel oil back into play, says Julian Lee on Bloomberg. International Energy Agency forecasts show “that would be enough to tip the market into a supply deficit”. But rising prices would also create an incentive for a drop in demand. “Tripledigit oil prices” are a possibility again, but far from a sure bet.
Against this backdrop, the real question is why oil hasn’t spiked further and faster, says The Economist. Prices have stayed in a fairly tight range between $75-$85 a barrel for much of the past year. America’s shale-oil boom, coupled with new production by non-Opec producers, has reduced the Middle East’s centrality. In 1974 37% of global crude came from the region, compared with about 29% today. Opec members also have “ample spare production capacity”, which could quickly be activated to fill in for any major disruptions. Finally, global demand remains sluggish as anaemic global growth and the growth of green alternatives slowly whittles away at the world’s appetite for fuel.