IEEJ：March ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (574)March 4, 2022

Crude Oil Prices Up above $110/bbl amid Intensifying Ukraine Crisis
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices are spiking. On March 2, the front-month futures contract for West Texas
Intermediate gained $7.19 per barrel or 7% from the previous day to $110.60/bbl, closing above$110/bbl for the first time since September 2013. The key Brent futures price also rose to$112.93/bbl. On March 3, WTI soared above $116 before closing at $106.67/bbl, down $2.93/bbl. Inthe past week, crude oil prices rose by $15-20/bbl. Needless to say, the biggest factor behind thecrude oil price spikes is the intensifying Ukraine crisis.
Russia’s military invasion into Ukraine started on February 24 and has met strong
resistance from Ukrainian forces and people despite Russian forces’ intensifying offensive. The war,
including the battle over the Ukrainian capital of Kiev, still remains in the balance. As more than
2,000 civilians have reportedly been killed in Ukraine, Russia has come under heavy fire from theinternational community including industrial democracies. At an emergency session of the United
Nations General Assembly on March 2, 141 countries voted for a resolution to condemn Russia’s
invasion of Ukraine and call for Russia’s immediate stop of its use of force and withdrawal fromUkraine. The harsh resolution against Russia indicates that a large majority of countries in the world
have concluded that the Russian invasion is an unignorable, outrageous act that infringes Ukraine’ssovereignty and territorial integrity, is a use of force to change the status quo and represents achallenge to international order. At present, Western countries have sent no troops to Ukraine,
leaving Russia and Ukraine to wage the war. Western countries and the international community
have embarked on economic cooperation and the acceptance of refugees to support Ukraine
suffering from the Russian invasion, while implementing tough economic sanctions on Russia.
Sanctions target President Vladimir Putin and oligarch business leaders supporting him, as
well as the financial industry and the high technology sector including semiconductors. Among them,the exclusion of major Russian financial institutions from the Society for Worldwide Interbank
Financial Telecommunications (SWIFT) has become big news as an extremely tough sanction. U.S.
sanctions to effectively freeze the Russian central bank’s assets in the United States and restrict
transactions with the central bank are combined with the SWIFT exclusion to exert great impacts on
the Russian economy. The SWIFT exclusion, if targeting financial institutions involved in energy
transactions, might affect Russian energy exports, coming as a backlash against Europe that depends
heavily on energy imports from Russia. In this respect, the European Union on March 2 announced
that the seven major Russian banks subject to the SWIFT exclusion would not include Sberbank, thelargest Russian bank, and Gazprombank affiliated with Russia’s state-run gas company Gazprom,indicating concern about the sanction’s effects on Russian energy exports. However, the economic
sanctions that have been implemented so far are far tougher than earlier assumed.
In such situation, insecurity about Russian energy exports has grown, leading to pricespikes and destabilization in international energy markets. Russia is among the leading oil and gas
exporters, accounting for 7.43 million barrels per day or 11% of global oil exports in 2020 and 238.1
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billion cubic meters (197.7 billion m3 in pipeline exports and 40.4 billion m3 in liquefied natural gasexports) or 25% of global gas exports. Although Russia has expanded energy exports to Asia
including China, most of its Russian energy exports are destined to Europe with which Russia hasdeveloped infrastructure including pipelines. Russia’s competitive energy supply holds a key
position in Europe, accounting for about 30% of oil supply in Europe and about 40% of gas supply
there. Russia has thus become an extremely important energy source for Europe.
The important Russian oil and gas exports are exposed to the risk of disruptions due to theRussian military invasion and Western economic sanctions. At present, it is difficult to predict how
supply disruptions would arise, how much the disruptions would be and how long the disruptions
would continue. Given the current situation, however, the following three patterns of disruptions areconceivable:(1) Supply will decrease as Western economic sanctions restrict Russian energy transactions.
(2) Supply will decrease or stop as attacks on major Ukrainian energy infrastructure facilities
including pipelines damage them or make them inoperable.
(3) Russia will cut or stop energy exports to counter Western sanctions.
Regarding the first pattern, the abovementioned SWIFT exclusion’s expansion to covermajor financial institutions handling energy transactions would exert great impacts. A spreading
view is that the sanctions have begun to affect Russian oil exports as traders have avoided theacceptance of Russian oil in view of Western sanctions, forcing Russian oil prices to be substantially
discounted. As for the second pattern, Russian natural gas exports to Europe via Ukraine, now at 40
billion m3, could be exposed to the risk of disruptions depending on future war developments.
Regarding the third pattern, Russia could use oil and gas as weapons. This means that Russia could
take hostile actions against Europe and other major energy consuming countries, hurting Russia’sposition as a reliable supplier that it has taken much time to build. Therefore, this option is difficult
for Russia to adopt under usually reasonable decisions. However, what would happen in Russia is
now uncertain. We must take the pattern into account.
It is impossible to predict which pattern is plausible, how these patterns would becombined, how Russian energy exports would be affected and how long they would be affected. At
least, however, we must seriously consider the possibility of considerable Russian energy exports
being affected or disrupted. Therefore, international energy markets will brace for the possibility,
leading energy futures prices to soar.
As a matter of course, factors other than the Ukraine crisis were behind the March 2 crude
oil price spikes. The OPEC-plus group of oil-producing countries at a meeting on the day decided toincrease production in April by 0.4 million bpd as earlier planned, instead of boosting production
more as requested by oil-consuming countries. The decision encouraged the WTI price to shoot up
beyond $110/bbl. Although industrial democracies hoped that the group would accept an additional
production increase to apply a brake to oil price hikes, the OPEC-plus group attributed the high oil
prices to geopolitical risks and indicated that the monthly production increase of 0.4 million bpd
would be sufficient. Within the OPEC-group including Russia, the Organization of Petroleum
Exporting Countries might have given priority to the integrity of the group’s coordinated production.
Some people point out that the United States has failed to coordinate views with OPEC leader Saudi
Arabia. A key point for the immediate future would be how Saudi Arabia would respond to anenhanced U.S. request for the group to accelerate its production increase. Now that the International
Energy Agency has led an initiative to release 60 million barrels of oil reserves, its impacts may
attract attention. We must also watch the fate of the Iran-U.S. nuclear talks, Iran’s potential
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comeback to the international oil market and a potential increase in U.S. shale oil production toward
the second half of this year. Anyway, however, the fate of the Ukraine crisis and potential disruptions
to Russian energy exports will remain the largest risk factor to jolt the international oil market andother energy markets. We must pay attention to future developments and the crisis’s impacts on theglobal economy and energy security, including those on the gas and LNG market that features lesssurplus supply capacity and fewer alternative supply sources than the oil market.

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