Brent crude oil prices hit a seven-year high on Tuesday as war came a step closer with Russian president Vladimir Putin sending troops into two separatist controlled regions in Ukraine backed by Moscow.
“In the short term, we’re simply going to be trading the headlines,” Robert Rennie, global head of market strategy at Sydney-based Westpac told the Financial Times.
“Obviously the headlines have taken a very ominous turn in the last few hours.”
The market moved after Putin agreed to recognise the two Russia-backed separatist regions in Ukraine of Luhansk and Donetsk, raising fears this could mark the start of a military incursion.
US secretary of state Anthony Blinken declared the move a “clear attack” on Ukraine’s sovereignty, with Washington due to announce further measures against Russia today, while the UK was also discussing additional sanctions in a meeting at the time of writing.
Analysts at US investment bank JP Morgan estimated oil could hit USD 120/bbl in the coming weeks if the crisis worsened, with Russia a major supplier to the West responsible for around a quarter of Europe’s crude imports.
Note of caution
Analysts at Phillip Nova sounded a note of caution, however, saying “it is not immediately clear at the time of writing whether the Russian military action was the start of an invasion of Ukraine”.
“There was no word on the size of the force Putin was dispatching, when they would cross the border and exactly what their mission would be.”
However, the move would put “security forces closer to direct confrontation with Ukrainian soldiers”, said the analysts.
Meanwhile, a separate report in the FT warned some of the world’s biggest oil companies and commodity traders were at risk of disruption to investments in Russia if the West imposed further sanctions.
Financial and economic penalties could hit energy firms with large interests in Russia such as BP, Shell and ExxonMobil and commodity traders such as Glencore, Vitol and Trafigura.
“Extensive sanctions would be really problematic for the energy sector, even if they don’t directly target exports,” Livia Paggi, head of political risk at consultancy GPW, told the UK business daily.
The biggest risk to commodity markets, however, would not come from sanctions but how Russia might retaliate, said Helima Croft, global head of commodity strategy at RBC Capital Markets.
“Weaponisation of commodities”
“There is broad concern about the weaponisation of commodities by Russia in response to potentially facing the most onerous sanctions to date,” she added.
Given an already squeezed market, with gas prices around record levels and oil at multi-year highs, any move by Russia to hold back supplies would send prices skyrocketing.
Along with oil, Russia is the main EU supplier of natural gas and coal.