Crude Oil Gains Momentum on Geopolitical Risk

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Crude oil markets have been gaining momentum. Since the start of the year, crude prices have increased by approximately 15 percent. Presently, WTI and Brett are trading at $80 and $85 per barrel, respectively. Several factors seem to be driving crude oil prices, but the principal one is geopolitical risk.

Undoubtedly, the tumult in the Middle East has placed markets on edge. Since Hamas attacked Israel and Israel commenced military operations in Gaza, the markets have been fearful that this conflict might spread throughout the region. We have experienced issues connected to the Israel-Hamas conflict, such as the Houthis targeting ships in the Bab al-Mandab Strait and Hezbollah increasing its activities on Israel's northern borders. At least presently, this conflict has been largely confined. In fact, rumours of a potential ceasefire, while not yet materialising, have put downward pressure on crude prices in the past few days.

A map showing the vulnerability of Russia's oil refineries due to Ukraine's drone range.

On the other hand, the war in Ukraine does not appear to be moving in a positive direction. Due to waving support from the United States, the most recent military aid package is currently languishing in Congress; Ukraine has suffered several setbacks on the battlefield in the past months. As a result of Ukraine's lack of success on the battlefield, it has resorted to drone strikes deep inside Russia. These drone strikes appear to be targeting Russia's energy infrastructure (Ukraine is taking a page out of Russia's own playbook). After several successful strikes, the Financial Times recently reported that the United States requested Ukraine refrain from attacking Russia's energy infrastructure out of fear that it would drive up the price of energy. Rising energy prices are never a positive before a presidential election. Under the current circumstances, with Ukraine being on the back foot, it seems unlikely that Ukraine will heed the administration’s request because it must show some level of success to its citizens to support the war.

This weekend, there was a terrorist attack outside of Moscow at the Crocus City Hall. The attack resulted in approximately 137 deaths and many more injured. News organisations have reported that U.S. intelligence warned Russian officials of a potential terrorist attack, but these warnings were disregarded. An affiliate of the Islamic State, which calls itself the Islamic State – Khorasan Province (ISIS-K), has claimed responsibility for the attack. While the attack bore all the hallmarks of an ISIS operation – the jihadists seemed keen to stay alive - which has provoked many conspiracy theories. President Putin seems intent on connecting the attack to Ukraine, and as a result, it is likely that Russia will step up its activities on the Ukraine front and will most likely undertake strategic targeted attacks on ISIS bases.

On the whole, Ukrainian drone strikes into Russia targeting energy infrastructure and a terrorist attack in the heart of Russia only increases geopolitical risks, as well as supply risks, and most likely will continue to provide upward pressure on crude prices.

More: Market Updates, Geopolitics

Richard Soultanian