Güldem Atabay: Why does the oil price not decrease even if the hot war is over?

Let’s start by wishing that the negotiating table established in Belarus will end the occupation of Ukraine by Russia.

However, even if the hot war ended with minimal compromise, the world has changed irreversibly. Putin’s aggressive policies, which do not blink for a second to start a war, will continue to create a reaction for a long time.

The gradual hardening of the embargo imposed on Russia by the Western states since the beginning of the occupation; Despite the fact that the sanctions have turned into a situation that will hit them, the first evidence is the constant raising of hands in the joint steps taken. such as Germany. Another important turning point is that a country whose memories of World War II are always vivid increased its defense expenditures to 2% of its GNP and reduced it to 100 billion Euros.

The concern that Putin’s adventures may not be limited to Ukraine will not only increase the military buildup on European soil, but will most likely resurrect old fears and set the stage for a new era similar to the past in transatlantic relations.
The rise in oil prices that will be felt most in the short term. The important question is whether there is room for prices to fall again in the oil market, which already has a supply problem.
The fact that the global inflation is already high, the supply cannot keep up with the demand, and the risk of Russia coming on top of the shocks experienced in oil production with the pandemic prevents the price per barrel from falling below $100 in the short term. Of course, 100 dollars means a double blow to the world economy, both as an increase in inflation and a slowdown in growth.

How much it will rise above $100 and how long it will stay there will partly become clear with new steps from Russia. It should be understood that Putin has also lost his role as a reliable trading partner by waging war inside Europe and implying that his assertion will reach beyond Ukraine if not restrained. On the one hand, this situation will fuel the efforts to reduce Europe’s energy dependence on Russia and increase Green Energy investments; on the other hand, it will cause energy prices to remain high for several years as uncertainties become permanent.

In the oil market, prices have shown great volatility since the 1970s, due to the inability of supply to change simultaneously with demand and the geopolitical tensions largely stemming from the Middle East. The drop from $120 to $20, which we watched just before and after the 2008 Global Financial Crisis, is fresh in our memories.

The last major move was experienced in April at the beginning of the pandemic, when the oil price fell to the garbage level and the WTI barrel price fell to minus $40. When the 1.5-year low price course was shaped by the unexpectedly large demand for goods created by the introduction of vaccines, it rose again to $70 at the end of 2021. According to GoldmanSacsh’s estimation, even without the Ukraine factor, the price of oil per barrel would already be $100 or more in the third quarter of 2022.

With the Ukraine War, the clarification of how unpredictable and dangerous steps Russia can take creates different fluctuations in the oil price. But the oil market is neither eager nor capable of increasing production hastily after the shock of the pandemic.

It is necessary to open up the situation in which oil producers are stuck during the pandemic period.

With the first Covid shock, when economies started to shut down one after another and demand declined rapidly, supply could not be brought down simultaneously with the collapse in demand due to the lack of operational flexibility. The disagreement between OPEC and Russia caused the production restrictions to come into effect late. While these two situations brought oil prices down to minus $40 in April 2020, the recovery only took place with the introduction of vaccines.

However, the green transition and expectations that oil demand will peak and decline in 2050 have been preventing oil producers from making new investments for a while. The large cash generated in the oil market is mostly directed to shareholders rather than being invested. This alone means a production and supply shortage. This situation, which lasted for two years, resulted in the failure of OPEC+, which has announced a plan to increase its daily production by 400 thousand barrels every month since the end of last year, even in its promise.
Demand has already reached pre-pandemic levels. Oil supply, on the other hand, can operate at 90% of its pre-pandemic capacity. While OPEC+ enjoys creating more petro-dollars with increasing prices, it cannot even realize the production increase they had planned very slowly.

For now, Russia’s oil production is not the target of sanctions. The door to financial exchange, especially for gas sales to Europe, is left open. However, the possibility of Putin’s pursuit of war rather than reconciliation at the table creates the danger of Russian oil being included in the sanctions list.

It would be shocking, but not surprising, to see the price per barrel of $150 or more.

Russia is the world’s third largest oil producer and its share in total is around 11%. Although the doors to this flow are open, the big Western private oil companies have started to announce the decision to end their Russian partnerships, even if it costs billions of dollars.

Therefore, we have not seen steps that harden economically, such as pushing Russian oil out of the system, similar to Iran, or Russia’s announcement that it will cut off the natural gas flow to Europe as a counter-sanction. The arrival of these steps, of course, causes shock increases in oil prices that can only be balanced over time. It would be shocking, but not surprising, to see the price per barrel of $150 or more.

Even if such sharpening steps do not come, it seems much more reasonable that the price of oil will rise, rather than fall, in the next 12-18 months. Difficulties in the purchase of 11% Russian oil, efforts to reduce dependency on Russian energy divert demand to alternative markets at higher costs, OPEC+’s slow attitude towards increasing production and the fact that there is a capacity problem are important obstacles to the “normalization” of the oil price. The interest rate hike by central banks will slow down global economic growth and pull down demand, which will be felt after mid-2023 at the earliest. This means the continuation of energy demand for production purposes.

Although it is a market with very large volatility, it is useful to understand that the probability of oil price per barrel increasing from $ 100 to somewhere between 110-120 dollars is higher than the probability of falling back to 85 dollars.

These prices will accelerate inflation both in the world and in Turkey, and will put pressure on the currency TL by increasing the current account deficit of an energy importing country like Turkey.

GA /PoliticalPath

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