With the escalating tensions in Ukraine showing no sign of an early resolution and increasingly tough talk from Vladimir Putin over the weekend, commodities markets have predictably reacted to this uncertainty pushing up oil and gas futures.
The Wall Street Journal reported that US crude oil futures hit their highest so far this year and highlighted that, with Ukraine being a major transit country for both Russian oil and gas, any uncertainty over the possibility of conflict in the Ukraine will inevitably raise prices. Harking back to last summer when it looked as if the US was going to intervene in Syria over the use of chemical weapons, they pointed out that this caused a $15 a barrel increase in oil prices.
Reuters reported that President Putin’s comments over the weekend may be a signal that he is not satisfied to merely take over the Crimea but wants to move troops into Eastern Ukraine as well. This potential threat of war drove Brent Crude up 2.2 percent to $111.41 earlier today.
Bloomberg did inject some reality into the growing crisis by highlighting that, whilst any threat of war will drive up oil prices, Russia relies heavily on oil and gas revenues with over half of their budget revenue coming from the sale of oil and gas. Forbes is quoted as saying that sales last year earned approximately $415 billion. Any threat to Russia’s ability to sell oil and gas would have a massive impact on their economy and will be something that President Putin is factoring into his thoughts. Having said that, an increase in oil prices is good for the Russian economy as long as they can avoid disruption to supplies.
Europe is at more threat from any political manoeuvring by President Putin with 34.5 percent of the EU’s oil imports coming from Russia. Should Russia cut off this supply, the price hikes would be massive and this isn’t unknown territory for Russia given they cut off gas supplies to Ukraine back in 2009.
What does this mean for heating oil?
Heating oil prices are closely allied to the cost of crude oil so any spike in crude oil is likely to have some impact on heating oil prices. The only saving grace is that we are now approaching the point in the year when demand for heating oil traditionally recedes and, given the very mild winter that has been experienced across most of Europe, prices are currently relatively low. Having said that, the Syrian conflict late last summer did see a spike in heating oil prices even though it was summer when demand is low purely because crude oil spiked.
Watch and wait
All we can do for the time being is watch, wait and hope that a political resolution can be found to the Ukrainian conflict before it escalates into war. Heating oil users who are running low would be wise to top up now whilst prices are still unseasonably low and before rises in crude oil prices impact.
For more information on the Ukrainian situation and the impact on oil prices:
Reuters reports on oil price jump following Ukraine unrest: http://www.reuters.com/article/2014/03/03/us-markets-global-idUSBRE96S00E20140303
The Wall Street Journal reports on oil supply disruption fears for Ukraine: http://blogs.wsj.com/moneybeat/2014/03/02/oil-prices-rise-on-fears-of-supply-disruption-over-ukraine/
Bloomberg reports how issues in Ukraine and causing a rise in oil and gas prices: http://www.bloomberg.com/news/2014-03-02/ukraine-tension-seen-stoking-gas-crude-prices-when-markets-open.html