Oil heading higher as Ukraine tensions escalate; price depends on what happens next

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This article was published 22/02/2022 (1038 days ago), so information in it may no longer be current.

CALGARY – Oil prices are rapidly heading toward US$100 a barrel, but analysts say the chances of crude smashing that threshold greatly depends on what happens next in Ukraine.

The potential for a war in eastern Europe has made energy prices volatile over investor fears that conflict between Russia and Ukraine could disrupt supplies. Russia produces 10 per cent of global oil supply.

On Wednesday, the benchmark West Texas Intermediate price came close to US$94 per barrel in the morning’s trading, and many experts have suggested it will go higher.

“I think based on the momentum we’re seeing, unless we see a major pullback in Russian aggression, we likely will top $100 a barrel,” said Rory Johnson, managing director and market economist at Toronto-based Price Street Inc.

“But as of yet, this does seem to be purely geopolitical risk pricing, rather than any immediate fear of an actual loss of barrels.”

Investors have been closely watching developments in Ukraine, where Russia has amassed troops for a potential invasion. The U.S. and other western nations have already responded with sanctions — driving investor concerns that Russia could respond by halting oil exports — and Germany withdrew a document needed for certification of the Nord Stream 2 gas pipeline from Russia.

Johnston said it’s highly unlikely the Ukraine crisis will result in a physical loss of barrels to the market, but if that were to happen, it would be “an extremely big deal.”

In the worst-case scenario, he said — such as an all-out armed conflict between Russia and NATO forces — oil prices could skyrocket.

“Say we lost half of Russian production, which again I think is very unlikely,” Johnston said. “But yeah, $130, $150 — pick a number in the hundreds and you could very easily justify it.”

Patrick de Haan — head of petroleum analysis for gas price information website GasBuddy.com — said the effects of tensions in Ukraine have already affected gasoline prices in Canada, with the average price at the pump steadily increasing over the last few weeks. On Wednesday, according to GasBuddy.com, the average retail gasoline price in Canada was 156.2 cents per litre.

“We do expect prices to continue to rise throughout the spring and potentially summer,” de Haan said in a email, adding prices typically rise in the spring anyway and the situation in eastern Europe is expected to exacerbate that trend.

“All of these factors could contribute to gas prices potentially increasing 15 to 30 cents per litre between now and the end of May, or more depending on the outcome of the Russia situation,” he said.

The tensions in Ukraine could also impact global trade flows of agriculture and fertilizer products, warned Canadian potash giant Nutrien Ltd. (Russia is the second-largest global producer of potash, following Canada).

“Nutrien hopes for a peaceful solution to the conflict in eastern Europe,” said Megan Fielding, a spokeswoman for the Saskatoon-based company, in an email. “We cannot predict the impact that geopolitical events may have on the global market, however we continue to monitor the situation and do our part to ensure our customers get what they need.”

A TD Economics report Wednesday said the economic fallout from the Ukraine crisis will be “highly path dependent on what comes next” and the scope of any further Russian incursion into Ukraine. TD laid out two scenarios — one in which oil prices spike but then reverse within a quarter or two.

In a second, more severe scenario, TD says the energy shock could be accompanied by a “global confidence shock” that drags equity markets down and could impact Canadian economic growth in 2022.

One Canadian company with operations in Ukraine said Wednesday it is bracing for potential war by moving its employees far away from the conflict line. TIU Canada, a solar energy company owned by Calgary-based Refraction Asset Management, has been working in Ukraine since 2016 and has invested more than $65 million in Ukrainian solar power plants.

“We have also ensured our employees have necessary emergency supplies in the event of a catastrophe as well as arranged temporary locations to shelter-in-place if needed,” said TIU Canada chief executive Michael Yurkovich, in an emailed statement.

TIU Canada, which was the first investor in Ukraine under the Canadian Ukrainian Free Trade Agreement and remains one of the largest Canadian investors in Ukraine, said it feels strongly that NATO and the UN must step in and stop Russian escalation.

“Nevertheless, our company continues to operate and produce energy in Ukraine,” Yurkovich said. “In some places the population continues to act calmly and go about business. That includes us.”

On Wednesday, flights to the Ukrainian capital of Kyiv appeared unavailable through Air Canada’s website until March 9. The Montreal-based airline does not fly directly to Ukraine, but offers flights to Kyiv and the port city of Odessa via Star Alliance partner airlines such as Lufthansa and Swiss International Air, which have both halted trips to the embattled country.

Air Canada said last week it will allow customers flying to Ukraine to change their trip with no fees.

Toronto-based gold miner Kinross Gold Corp., which has operations in Russia, said its operations are unaffected by the U.S. sanctions announced Tuesday.

Kinross, which operates the Kupol mine in the Chukotka region in the northeastern corner of Russia, noted it has successfully operated in Russia for more than 25 years and has previously managed through similar situations.

In addition to the Kupol mine, Kinross has the Udinsk project in Russia.

Kinross, which also has mines and projects in the U.S., Brazil, Mauritania, Chile and Ghana, said it expects about 13 per cent of its global production this year to come from Russia.

This report by The Canadian Press was first published Feb. 23, 2022.

With files from The Associated Press and Christopher Reynolds in Montreal.

Companies in this story: (TSX:K; TSX:AC)