The European benchmark price for oil could hit US$140 per barrel if energy becomes a weapon in the escalating conflict over Ukraine, according to an analyst at Capital Economics who sees multiple ways such a disruption could play out.
Ukraine announced plans on Wednesday for a 30-day state of emergency. The declaration comes amid reports of Russian troops advancing into pro-Moscow separatist regions in Ukraine's east. On Monday, Russian President Vladimir Putin insisted in a video address that his country’s interest and security are non-negotiable. However, Putin has also said he remains open to a "diplomatic solution."
The European Union, the U.S. and the UK are among the foreign powers currently imposing sanctions on Russia.
“It is not in the economic interests of either Russia or the West to use trade in energy as a weapon against each other, but that is not to say it won’t happen,” Edward Gardner, a commodities economist at London-based Capital Economics, wrote in a research note on Tuesday. “If energy flows were disrupted, we think oil prices could settle at around US$120 to US$140 per barrel, before coming back down as trade flows re-route.”
Brent crude continued to track towards US$100 per barrel on Wednesday, climbing 0.48 per cent to US$97.30 as at 11:30 a.m. ET.
Gardner says Russia and the West have “significant energy ties and a mutual dependence.”
“Either side could throw economic caution to the wind and directly target energy flows. This could happen if Russia conducted a large-scale invasion of Ukraine, and Europe and the U.S. put aside their concerns about energy security. Or it could happen if Russia decided to respond aggressively to Western sanctions,” he wrote.
“Alternatively, energy flows could be disrupted by the conflict itself. For example, oil and gas pipelines running through Ukraine could be damaged, while exports of oil (and coal) through the Black Sea could fall if ships were not able to freely transit or if they purposefully avoided the area.”
Rachel Ziemba, an adjunct senior fellow at the think tank Center for a New American Security, says uncertainty about how Russia is defining its interests places a wide range of outcomes on the table. She notes that a “conflict-related issue” for oil would add to upward price pressure from tight global supply.
“Given the fundamental tightening already present in the market and limited sources of new supply, prices would rise, perhaps a lot,” she told Yahoo Finance Canada on Wednesday. “Realistically, I see Russia being more likely to use leverage in natural gas space than in oil, though perhaps that has mostly played out, as no EU country is going to sign long-term contracts right now.”
On Wednesday, U.S. President Joe Biden announced sanctions on Nord Stream 2 AG and its corporate officers. The company is majority-owned by the Russian energy giant Gazprom.
"President Putin has provided the world with an overwhelming incentive to move away from Russian gas and to other forms of energy," Biden said in a statement on Wednesday. "These steps are another piece of our initial tranche of sanctions in response to Russia’s actions in Ukraine. As I have made clear, we will not hesitate to take further steps if Russia continues to escalate."
Biden's announcement follows Germany on Tuesday halting certification of the Nord Stream 2 gas pipeline project that would transport natural gas from Russia to Germany.
-With files from Bloomberg
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.