Oil prices could average $135 in 2022 if Russian-Ukrainian war continues, says MUFG Bank

Russia’s military aggression in Ukraine has introduced an oil price risk premium that is expected to remain entrenched in markets for months, with average oil prices reaching $135 a barrel this year, MUFG Bank said.

With little progress on the diplomatic front and Moscow facing the threat of further sanctions amid the protracted war, the price of Brent is expected to climb above $140 a barrel in the second quarter of this year, Ehsan Khoman, director of emerging markets research for Europe, Middle East and Africa at MUFG Bank, said in a research note on Monday.

Physical deliveries of Russian maritime crude are set to slump from the second quarter which, combined with simultaneous shortfalls from depleted inventories and reduced spare capacity, means oil prices will be significantly higher at short term.

“Barring a breakthrough in the peace negotiations, we believe that price-induced demand destruction – the only practical mechanism currently available in a world devoid of buffer stocks and elasticity of supply – necessary to reducing consumption becomes widespread in the third quarter, with a corresponding Brent price above $140 a barrel,” Khoman said.

“We believe this is the peak level of pain that could rattle corporate activity, squeeze private consumption and eventually begin to ease strong market stress.”

Brent crude, the global benchmark for two-thirds of the world’s oil, was up 0.64% at $105.1 a barrel as of 1:07 p.m. UAE time on Monday. West Texas Intermediate, the gauge that tracks U.S. crude, rose 0.90% to $102.2 a barrel.

Brent crude, which rose to just under $140 a barrel in March, suffered a sharp decline last week, falling more than 13%, after US President Joe Biden announced a record release of crude from reserves. oil strategies. The United States is releasing one million barrels of oil a day over the next six months, which equates to about 180 million barrels.

The member countries of the International Energy Agency have also agreed to a new release of emergency stock to bring market volatility under control. The Paris-based agency said on Friday it would announce details of the release of emergency reserves this week, which is in addition to the 62.7 million barrels already committed to the market.

However, oil prices have fallen to levels that do not reflect the risk of disruption to Russian exports or China’s ability to contain the coronavirus pandemic, said Vitol, the world’s largest independent crude trader.

MUFG Bank, Japan’s biggest lender, has drawn up three near-term oil price scenarios – easing, extension and escalation – reflecting the wide range of potential geopolitical outcomes stemming from Russia’s continued aggression in Ukraine.

The easing scenario, with a 40% probability of occurrence, assumes a ceasefire and de-escalation in the Russian-Ukrainian conflict, laying the groundwork for the withdrawal of Russian forces and the easing of sanctions. This could lead to crude flows returning to pre-crisis levels and averaging $96 per barrel in the second quarter, $90 per barrel over all of 2022 and $94 per barrel in 2023.

Barring a breakthrough in the peace talks, we believe the price-induced demand destruction needed to reduce consumption will become widespread in the third quarter, with a corresponding Brent price above $140 a barrel.

Ehsan Khoman, Director, Emerging Markets Research for EMEA, MUFG Bank

In its extension scenario, with a 55% probability, the conflict will continue with limited progress on the diplomatic front and sanctions against Russia will remain or intensify.

“We believe this scenario has the highest probability of occurring, which includes a geopolitical risk premium in the oil extension,” Khoman said.

“In this scenario, we expect Brent oil to rise and average $142 per barrel in the second quarter of 2022, $135 per barrel for 2022 as a whole, and $112 per barrel for 2023.”

The escalation scenario, with a probability factor of 5%, involves general sanctions with the potential for explicit NATO involvement in the conflict. An escalation of the war in Ukraine will force a heavy-handed economic response from NATO allies to extort maximum costs, further isolating Russia with direct sanctions on energy exports.

MUFG expects Brent to reach $165 per barrel in the second quarter, an average of $180 per barrel for 2022 as a whole and reach $138 in 2023 in such a scenario.

“Given the unprecedented geopolitical landscape and the great uncertainty as to how the Russian invasion of Ukraine will play out and the resulting disruption of energy flows, we recognize that prices could rise beyond these levels in the escalation scenario,” Khoman said.

Updated: April 04, 2022, 11:50 a.m.

Steve R. Hansen