The oil market has been yo-yoing up and down in recent weeks. After a steep decline last week, the Brent crude oil quote has risen sharply again this week. The oil market is and remains very volatile and analysts are very careful about making predictions. For the longer term, Russia remains the major factor of uncertainty in the market. The question is how the country will maintain itself within the international community. In the shorter term, it is America in particular that is trying to control the oil price and closely related inflation.
Monday, April 11, Brent crude closed at $99,52 a barrel. That is the lowest level in less than a month. However, the dip below $100 a barrel proved short-lived. The rest of the week saw a solid rise and today Brent is quoted at $111,66 a barrel. That is the highest price so far in April.
There are several reasons why the market is so volatile. The consequences of corona had not yet been absorbed by the market when the next crisis already presented itself in the form of the war in Ukraine. Russia is a major oil producer and one of the few countries with serious spare capacity to fill gaps in the market. The current sanctions and the threat of additional measures or not creates a lot of uncertainty among traders.
Unique situation
That uncertainty was fueled again this week by the credit rating agencies S&P and Moody's. Both firms expect that Russia could default on its national debt, which is denominated in dollars and euros. Not because the country does not have sufficient reserves in this currency (in fact Russia has the fourth largest reserves) but because these assets have been frozen by Western sanctions. This would be the first time since 1917, the year of the Russian revolution, that Russia has failed to pay its debt in foreign currency.
However, the Russian economy is largely dependent on energy exports. To compensate for the loss of the Western market, Russia is therefore diligently looking for other buyers. As a neighboring country, China is a logical option, but the Chinese leaders have already proven to be rock hard negotiators in the past and Russia's starting position is not exactly favourable. India is another export opportunity for Russia. Unlike China, India hardly imports oil from Russia. The bulk of their energy comes from the Middle East. The western camp, led by the US, is trying to get India behind the boycott on Russian oil. New Delhi is dancing on a thin rope. On the one hand, the government has condemned the attack on sovereign Ukraine, but on the other hand, the country does not simply want to join the West. It is a balancing act between international and national interests. Being able to buy Russian oil at a significant discount is tempting, but you don't want to antagonize the US and vice versa.
Controversial measure
US President Biden has presented a new strategy in the fight against high oil prices and related inflation. Several calls to OPEC to ramp up production have had no effect. That is why it was previously decided by the White House to market oil from the strategic reserves. On Wednesday, April 13, it was announced that Biden now also wants to increase the blending percentage for bioethanol from 10% to 15% in the summer months. This measure serves two purposes. On the one hand, the US should become less dependent on Russian oil, and on the other hand, the price of gasoline for American consumers should be lowered.
The measure is not welcomed by everyone, however. Various parties in the animal/meat sector have already expressed their fears about rising feed costs, among other things. According to them, the question is to what extent this can be passed on to the consumer. From other quarters there is mainly criticism of the use of food as fuel. The poorer countries in the world are already struggling to stock up on enough grain. The World Bank and the IMF, among others, warned this week of a food crisis. For some, this raises the question of whether it is morally justifiable to use part of the already scarce grain supply as fuel.
Diesel doesn't go down but it does go up
It is striking in the diesel price that it has followed the trend of the crude oil neatly. On Monday, April 11, diesel stood at €141,70 per 100 litres. That has increased this week to eventually €153,57 per 100 liters today (Friday 15 April). This is remarkable because the diesel price barely fell last week despite the fact that crude oil took a big step back. The diesel and crude oil prices out of step is more common and often the profit margin for the oil companies is mentioned as an important factor. Now there is the extreme volatility on top of that. Companies therefore keep extra margin.