The Russian-Ukrainian crisis has already caused a rift in the world oil market, as Western sanctions against Russia for invading Ukraine are expected to cut oil supplies, says investment firm Edmond de Rothschild, who outlines two price scenarios. of crude.
According to the investment company, sanctions on a Russian basis will hit Russian exports and it estimates that they will erode the world market by 5%, as Russia represents about 10% of world production, is the second largest oil producer after USA and a key “player” of the oil market.
However, he added that in the coming months, shortages in the oil market could be offset by other producers, especially if Iranian oil returns to the world market. This could mitigate the impact of sanctions on the Russian oil sector on oil prices.
More specifically, as noted by Edmond de Rothschild, geopolitical shocks trigger price spikes, however, in the medium to long term, different behaviors have been observed in the evolution of oil prices. In this context, he formulates two scenarios: In the first the prices remain high for a long time, as happened during the Iranian revolution and the Iran-Iraq war, while in the second the prices show a rapid de-escalation, as in the first Gulf War in 1990-1991.
Scenario one
According to the investment company, during the period 1978-1988, when the Iranian revolution took place, at a time when Iran was the largest oil producer of OPEC, and the Iran-Iran war (1980-1988), the price oil prices jumped sharply from $ 14 a barrel to $ 42 a barrel and fell slightly in the following years, as 1986, a year in which the United States and Saudi Arabia agreed to cut prices sharply and the Iran-Iraq war seemed to be approaching at the end of it, the price was at $ 30 a barrel.
The same period was accompanied by a decline in production and consumption of about 15% in the period 1979-1983, as well as very weak global economic growth (slightly less than 1.6% on average in the period 1980-1983).
Scenario two
By contrast, during the first Gulf War between August 1990 and February 1991, the price of oil jumped from $ 17 a barrel to $ 38 in October, before returning to $ 17 in May 1991.
Global economic growth has suffered a limited shock, with the growth rate in 1991 at 3.4%. This shows, according to the investment company, that the uncertainties created during the first Gulf War were short-lived compared to those of the early 1980s.
In this case, producer countries such as Saudi Arabia worked much more systematically to stabilize prices than during the Iran-Iraq war, when strong US pressure was needed in 1985-1986 to significantly increase production. their. This fall in prices was part of the US strategy to support its economy and weaken the USSR.
The Russian-Ukrainian crisis is a “catalyst” for developments
At present, although Russia is a major player in the global oil market, Edmond de Rothschild points out that oil-importing countries have ways to reduce their role and the impact of sanctions on the Russian oil sector.
He notes that the Russian-Ukrainian crisis could serve as a “catalyst” for accelerating consultations on a new agreement on Iran’s nuclear program, which would pave the way for Tehran’s return to the global oil market. in fact, Iran could double its production from 2 to 4 million barrels per day in a year, ie to pre-sanctions levels.
He added that in view of the expiration of sanctions, Iran is increasing its reserves and plans to sell more oil when they are lifted. By mid-2021, Iran’s oil reserves are estimated at about 100 million barrels, or about a quarter of current US reserves. The availability of such a volume in the market very quickly, as noted by the investment company, would have a downward effect on the price.
In addition, he points out that the Russian-Ukrainian crisis could lead to a easing of sanctions against Venezuela, which in the short term estimates that it could double its production and reach 1 million barrels per day and in the future return to 2 million barrels.
US and Arabian Peninsula can rapidly increase its production
Edmond de Rothschild also points out that both the US and the Arab states could rapidly increase their oil production.
The United States currently produces about 11 million barrels a day, up from a record 13 million barrels a day before the crisis. The current price of almost $ 100 per barrel could push US producers to significantly increase their production. He estimates that by the end of the year American production could reach a level close to its record high, recording an increase of 1.5 to 2 million barrels per day.
Countries in the Arabian Peninsula, such as Saudi Arabia, Kuwait and the United Arab Emirates, could also increase production quickly, the investment firm said.
Taking into account only the biggest players, in total, oil production could increase quite quickly by about 5 million barrels per day, estimates Edmond de Rothschild. Even if this volume does not fully offset Russian production, it is likely that it could largely offset Russian oil exports outside China, which is currently Russia’s largest customer and no change is expected in the meantime. their relationship.
Therefore, the investment company notes that potential increases in production could therefore limit the rise in prices caused by political tensions and threats around the sale of Russian oil.
Source: Capital
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