Russia-Ukraine crisis: Crude oil prices soar past $100 a barrel – Cause for worry for India

Oil prices jumped on February 24th, with Brent surpassing $100 per barrel for the first time in eight years, as Russia initiated an attack on Ukraine, raising worries that a European conflict may disrupt energy supplies.

Brent crude oil price surged 5.4% in a day. West Texas Intermediate (WTI) crude oil price jumped 5.9% to $97.58 a barrel, the highest level since August 2014.

Following months of tensions and weeks of reports that Russia was planning an assault on Ukraine, Russia’s President Vladimir Putin launched a military strike on numerous Ukrainian cities on February 24th. In a tweet, Ukraine’s Foreign Minister, Dmytro Kuleba, said that Putin had launched a full-scale invasion of Ukraine.

He also called for immediate action from foreign governments, including putting “devastating sanctions” on Russia, the provision of weapons for Ukraine, and financial and humanitarian assistance.

The market became concerned as the situation worsened. As a consequence, Brent oil soared to as high as $103.78 per barrel, the highest since August 14, 2014, according to Reuters, and was at $103.18 per barrel at 0830 GMT, up $6.34, or 6.5 percent. Furthermore, WTI oil futures in the United States rose $5.48, or 6%, to $97.58 per barrel after reaching a high of $98.46 on August 11, 2014.

Inflationary Surge

Crude’s return to triple digits caps a remarkable turnaround that was unthinkable a year ago, as the market shifts from surplus to shortage. It depicts a global economy returning to normalcy after Covid-19 quicker than it can secure supply of all types of raw resources.

“As demand returns to pre-Covid levels, supply is really struggling,” Giovanni Serio, global head of market analysis at Vitol Group, the world’s largest independent oil trader, said. Aside from oil and gas, Russia is a significant producer of aluminum and wheat, both of which Ukraine grows.

Multiple commodity price increases are leading to a jump in inflation to the greatest level in decades, triggering a cost-of-living catastrophe for millions and prompting central banks to consider a period of monetary tightening that might stifle the recovery.

“Oil prices continue to rise and are now approaching levels that are unsettling for consumers all around the world,” Toril Bosoni, head of the International Energy Agency’s markets and industry section, said in a Bloomberg Television interview. “The oil market is quite tight.”

While it is an urgent worry for all consuming nations, the surge has been especially troublesome for US President Joe Biden, whose attempts to control increasing gasoline costs ahead of this year’s midterm elections by deploying emergency reserves have been mostly ineffective.

Concern for India

The spike in oil prices is a big source of concern for India, which relies on imports to cover 85% of its oil consumption and 55% of its natural gas requirements. India spent $62.71 billion on crude oil imports in FY21, $101.4 billion in FY20, and $111.9 billion in FY19.

Shrikant Chouhan, head of equities research (Retail), Kotak Securities Ltd, stated that rising crude oil prices will raise the cost of oil imports, resulting in a surge in inflation in the future. In a recent analysis, ratings firm ICRA also stated that the Russia-Ukraine war may have a moderate impact on India, with the disturbance resulting in a short-term increase in commodity prices, especially oil and gas.

The Mint announced on February 26 that the government is examining the growing geopolitical scenario and would consider lowering gasoline excise charge if the current increase in oil prices lasts longer than can be absorbed by state-run fuel merchants.

The government has stated that it is keeping a close eye on the situation in the aftermath of the geopolitical unrest. Given the unpredictability of global oil prices, the ministry of petroleum and natural gas stated that it is committed to “supporting proposals for Strategic Petroleum Reserve releases.”

As per the consumption pattern of 2019-20, the total capacity in the established Strategic Petroleum Reserves facilities of 5.33 Million Metric Tonnes (MMT) is estimated to provide for about 9.5 days of crude oil requirement. Analysts, on the other hand, believe that with the probability of an Iran nuclear deal, the spike in oil prices will be limited, if not reversed, in the coming days.

Iran is the world’s ninth-largest oil producer, but economic sanctions have resulted in decreased output relative to potential.

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