To Understand the Effect of Russia -Ukraine War on crude oil market for better evaluation

To Understand the Effect of Russia -Ukraine War on crude oil market for better evaluation

ABSTRACT

With the evolution of the energy market in the past few decades and the simultaneous increase in demand for energy usage the global crude oil demand has risen tremendously in all the countries, be it the developing or the developed nations. The crude oil market is huge, with major world economies such as the USA, Saudi Arabia, and UAE associated with the export of crude oil, Russia a Non-OPEC nation, has emerged to be the 2nd largest exporter of crude oil to the countries around the globe. In fact, in 2020, Russia single handily exported 11% of total crude oil exports which was worth the value of 76.2 billion dollars. The crude oil market was a stable one before the arrival of the COVID-19 virus that disrupted the global supply chain of crude oil and now, as the war broke between Russia and Ukraine, the crude oil market is all set to face another wave of uncertainty.

INTRODUCTION

On 24th February, Russia launched a full-fledged military attack in certain parts of Ukraine leaving both countries in a darn situation. The Russian invasion of Ukraine is the biggest attack faced by any European country since World War – 2 and thus impact of this war is more than mass infrastructure destruction. The war has disturbed the major shipping ports that ultimately have led to the loss of trade and business not just on the local level but at the global level and it is because of the war that the crude oil market has once again risen to the highest level of prices owing to the differences caused in demand and supply curve of the crude oil in the economy.

The present study aims to study how particularly this war has contributed to the changing dynamics of the crude oil market in context with the western as well as Indian market and how the crude oil market will affect the other major sectors of the economy.

Understanding the Russian Market of Crude Oil

Share of Global Oil Reserves among OPEC and Non-OPEC nations

Figure1. Share of Global Oil Reserves among OPEC and Non-OPEC nations

These 14 countries account for 93.5% of oil reserves found in the entire world. Although, the major share of oil reserves lies down with OPEC nations. Among Non- OPEC nations Russia consists of 107 oil reserves (in billion barrels) that is 6.2% of oil reserves which makes Russia one of the top countries engaged in the trading of oil.

Crude Oil Production and export by Russia-

Graph showing Russia crude oil production in fiscal year 20-21

Figure2. Graph showing Russia crude oil production in fiscal year 20-21

Russia produced 10503 BBL/D/1K of crude of making it 3rd largest country (in terms of production) of crude oil. Out of this total production Russia exports about 5million barrels of crude oil per day. These figures clearly demonstrate the value of Russian crude oil in the global market.

Major export partners from Russia of crude oil-

Export value of crude oil (%) from Russia

The total export value of Russian crude oil in 2021was around 110,119 Million US dollars. Out of which most of the oil is exported to countries like China and other European nations like the Netherlands, Germany, Poland, etc. Thus, European nations form the backbone of the Russian oil industry but, as the war broke between Russia and Ukraine, tough sanctions were imposed on Russia by the European Union which to a certain extent disrupted the Russian export market and impacted the Russian oil market.

Effect of Russia– Ukraine war on crude oil market

Russia- Ukraine crisis only led to the increased crude oil prices at the global level. The increase was very much evident as both, the WTI crude, as well as Brent crude rose to their maximum values since 13 and 8 years respectively which in addition caused havoc with global oil supply chain ultimately affecting the economy of nations and causing market inflation.

Why there was a rise in crude oil prices?

  • The price of any commodity in the market is dependent on the demand and supply factors of that product in the market. If the demand for a particular product is higher than the supply, the price of that product will rise, whereas if the demand for a particular product is lower than the supply, the price of that product will go down. Similar things operate for crude oil price in global market.

  • During the Coronavirus pandemic, the price of the crude oil market slashed to its lowest value because economic demand was almost negligible as market operations were temporarily suspended. But as soon as the market started operating back to its normal functioning, the demand for crude oil rose hence prices at which crude oil was traded started to increase and rose to a value of 86.51 US Dollars in the month of January-2022 as shown in figure 4. 

Bar Graph depicting increase in crude oil prices after omicron virus

Figure4: Bar Graph depicting increase in crude oil prices after omicron virus

  • As the price of crude oil was already high, the war between Russia and Ukraine pushed the situation to become even worse with regular sanctions Russia faced from throughout the world, and because of disruption of transportation of crude oil barrels from Russia, the crude oil supply in the market drastically reduced, shooting crude oil prices to new high value.

  • Since the Russia’s invasion of Ukraine, the crude oil prices (both of Brent crude and WTI crude) increased exponentially as shown in figure5.

Figure5:

  1. Graph depicting how prices of Brent Crude increased from 89.16 USD/ barrel on 31st Jan to 123.21 USD/ barrel on 7th Mar (Blue color)

  1. Price OF WTI Crude increased from 88.15 USD/barrel on 31st Jan to 119.4 USD/barrel on 7th Mar (Maroon color)

Consequences of increased crude oil prices-

  • Crude oil is a necessity, and it is through its processing that major fuels such as diesel, petroleum, gasoline, jet fuel, etc. are obtained and therefore when price of crude oil increases it directly impacts the pricing of these products.

  • Every economy runs on crude oil and thus every nation has to buy it irrespective of the high prices it is sold at which affects the consumer and increases the cost of living.

Flowchart depict that how increase in price of crude oil causes inflation in the market

Figure6: Flowchart depict that how increase in price of crude oil causes inflation in the market

Impact of increased crude oil prices on Indian Economy

  • The ongoing scenario between Russia-Ukraine and its consequence on the crude oil market will not directly impact the Indian economy as India does not depend largely on Russia for its crude oil import.

  • But if the war continues Indian market will notice evident inflation, the current fiscal deficit of the Indian government will increase and there would be an effective increase in the Wholesale Price Index for the Indian market as crude oil-related products form 9% of the WPI margin of Indian imports.

  • High crude oil prices will increase the gas and LPG subsidy prices for the Indian consumer as there would be increase in prices of petrol and diesel.

  • The major area where India can be affected because of the Russia- Ukraine war would be the edible oil market as India is the main importer of edible oil from Ukraine and Russia. 70% of India’s sunflower oil is exported from Ukraine and thus prices of edible oil would increase in the Indian market.

CONCLUSION

The information mentioned in the report was able to precisely condense the data related to the effect of the Russia-Ukraine war on the crude oil market at the global level. Crude oil market stability is important factor in controlling the inflation rates in the economy hence these markets must be prevented at any cost to suffer the atrocities of war between two countries as crude oil prices directly hamper the cost of living of a consumer who forms the backbone of a particular economy. If the war further continues the prices of crude oil may increase to new records causing more disastrous consequences and directly impacting the nations throughout the world.

REFRENCES

To Understand the Effect of Russia -Ukraine War on crude oil market for better evaluation

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