This morning oil prices are up around 2% as the Russian government reported today that peace talks with the Ukrainians have come to a halt. This latest failure in peace efforts has reinvigorated supply worries in the market.
With Europe still divided on whether to sanction Russia’s oil and gas supply, there’s concern that the conflict could escalate and force a harsh Western response. Already, Western leaders from the US and France, among others, have labelled Russia’s actions as war crimes. With further conflict escalation may come harsher sanctions. This week Russian oil and gas condensate production fell below 10 MMbpd, the lowest since July 2020. It is clear that Russian production is starting to feel heavy downward pressure since all of the sanctions were imposed.
OPEC has remained on the sidelines throughout this conflict, and recent statements suggest they will continue to do so. This week they warned the European Union that current and possible future sanctions on Russia could create one of the worst supply shocks in history. OPEC has repeatedly said that it would be impossible to replace Russian volumes, and they made it clear pumping more oil on their end will not be a solution. With expected April losses for Russia around 1.5 MMbpd this month and 3 MMbpd next month, the supply crunch is expected to continue. Although fuel buyers enjoyed a brief price retreat this week, the worst price effects may still be yet to come.