March Oil Roundup: Prices Followed Events In Crimea

The movement of oil prices this month, closely followed events in the Crimean region. At the beginning of March, energy consumption slowed due to disappointing manufacturing activity in the U.S following the harsh winter weather. Oil prices suffered a strong pullback from an over five-month high, as tensions in Ukraine eased.

Into the second week of March, U.S. crude oil rose by almost 6 million barrels, twice as much as had been originally forecasted. The rise was partly explained by distribution issues in the Gulf of Mexico but much of the speculation was caused by rising tensions between Ukraine and Russia.

Oil prices continued to climb and leaped by 2$ a barrel as a result of the Russian army advancing into Ukraine, fears of escalation of the political situation spread through the commodities markets, as the West threatened sanctions against one of the world’s largest energy producers. Immediate reaction from global commodities markets resulted in oil futures surging to $104.51 a barrel on the New York Mercantile Exchange; the highest level since 23rd September 2013. Uncertainty as to how the Crimean struggle would play out heightened fears that Europe may be cut off from a vital source of energy. With continued momentum in Russian military aggression, oil prices surged to its highest level for the year so far, at $111.4 a barrel.

Fears of global oil price spikes were compounded by data released by OPEC after it raised its forecasts for world oil demand.

US president, Barack Obama declared that Russia would face strong opposition from the West and significant economic sanctions if the military intervention in Crimea continues. This global power struggle between Russia and the U.S has peaked at an interesting time. A pertinent question arises as a result of these struggles. Will the US be encouraged to lift its long standing oil export ban? With U.S oil production reaching its highest level for 25 years in 2013, members of Congress have highlighted the opportunities for the U.S as a major supplier of oil. There has been a self-implemented oil ban in place in the United States since the 1970s, yet with recent developments in hydraulic fracking, America has moved from a position of scarcity to oversupply of oil. Oil reserves in the U.S are said to rival both Russia and the Middle East and it is, perhaps, the right time for the U.S to assert themselves as an energy superpower.

A major trading partner and political ally, the Eurozone remains at the mercy of unsteady governmental regimes. This arrangement would consolidate the relationship between the US and Europe, further propelling the U.S as a Commodities powerhouse. The U.S is keen to punish the Russian government’s aggression, by driving global oil prices down by an estimated $12 a barrel, by selling 500,000 barrels a day from its domestic reserves. This would provide double the amount of oil required to cover any international coalition agreement between Russia and the West. It is estimated that this would cost Russia $40 billion dollar is lost income, or 2% of its economy.

International legislation may object to this blatant manipulation of prices as US contemplates making short term emergency oil supplies available. With global shortages and American oversupply of oil it seems a simple solution to a sensitive problem but may face some opposition. Many of the actions by Putin have been to assert his power over global energy markets and the Eurozone in particular and the prospect of competition form the U.S could take the wind out of his sales. The US administration is already implementing a test of supplying 5 million barrels through various distribution channels, but holds 696 million barrels as a reserve. US government officials have been keen to stress that the test has not been initiated by the Ukraine situation.

The global oil struggle is likely to continue; the only certainty in this situation, is that 2014 will prove an interesting year for Commodities investors.