International oil and gas prices may further surge. World is on the verge of deep recession

Though many of the experts of fifth-generation warfare thought that conventional war has become history, the Russia-Ukraine war has put their idea of modern-day warfare into serious scrutiny. 

Many thought that in the twenty-first century warfare will be determined less on the battlefield and more in cubicles and on screen. 

However, global economic repercussions caused by the warfare between Russia and Ukraine and economic warfare between Russia and, Europe and the United States, their spiralling actions and counteractions by the two sides have already brought the world to the brink of recession. 

Russia has continued its oil exports, though it has had to give a deep discount. But the EU has paid a high price. Russia has reduced gas supply through Nordstrom I to 20% of capacity. 

The price of natural gas has soared in the EU to $60 per MMBTU. This will have a cascading effect on the price of LNG in Asian markets. They have tripled to $45.39 per MMBTU on August 2022, from $15.65 MMBTU a year ago on August 2021. 

In order to survive winter, the EU has initiated operations at conventional fossil fuel units (coal base, oil-based), which were taken out of operation due to their commitment to net zero by 2050. 

This may further push back the target emission cut committed by the EU at London Summit. High gas prices have pushed the EU to switch from gas to oil and coal to meet its heating and power needs. This will add to the oil demand. The oil market is calm now because of the fear of recession. But if falling prices lead OPEC to cut production again, there will be a spike in crude prices again. 

The oil prices will also be affected by the fate of the Iranian nuclear deal. Recently, the negotiations had been resumed in Vienna. The delegations have now gone back to their capitals for a political decision. If the deal works out, it will pave the way for Iranian oil exports to be resumed. Before the latest round of sanctions, Iran was exporting 2.1 million barrels per day. 

This will not substitute more than five million barrels of Russian oil exports in case EU sanctions against that country deepen. Iranian oil, if it comes back to the market, will be a relief for the international oil market, though would not be sufficient to substitute Russian Supplies for EU, considering the same production rate from OPEC. However, considering the present US-Israel-EU lobbying and the current stance of the Iranian govt., it can be predicted that Iranian oil may not come into the international market in near future soon. 

In the meantime, the Middle East has become a field for the cold war for US and Russia. US President Joe Biden’s visit to Israel and Saudi Arabia was followed by the visit of Russian President Vladimir Putin to the other side of the gulf. Putin visited Tehran, where he also met the Turkish President. The Turkish economy has been in deep crisis, but its President harbours regional ambitions. Its control of the entry and exit from the Black Sea has underlined its locational advantage for both sides in the Ukraine crisis. This has increased the importance of Turkey to both camps, though Turkey is a NATO member. 

The sharp increase in oil prices following the Ukraine war brought President Biden to Saudi Arabia. This was seen as a departure from the position taken by candidate Biden during his election campaign when he had criticized the Crown Prince and threatened to make the Saudi Kingdom a pariah state. What prompted President Biden’s visit to the Saudi Kingdom was the increase in petrol price at the pump in the USA. This had reached the US-wide average of $5 per gallon. This was well past the comfort level of $4 per gallon long held as the limit the US consumer could tolerate. This had an ominous implication in an election year. The Congressional elections are due in November. A loss of the democratic majority in the house would seriously cramp President Biden’s capacity to shape the legislative agenda for the rest of his term.

The Crown Prince promised an increase in production. But the increase of 1,00,000 barrels per day announced subsequently by OPEC was rather disappointing. It was the smallest increase by that grouping in recent years. Despite, the underwhelming response to US President’s request, the market has not only stayed calm, but the prices have gone down.

The OPEC basket of crude has come down from $110.9 to $103.2 per barrel from July’22 last week to August’22 last week. The Indian crude oil basket has come down from $108.92 to $98.31 per barrel during the same period. This can only be attributed to fear of recession. The US economy has contracted for two quarters in a row. The balance in the oil market remains precarious. Any increase in geopolitical tensions in Europe could again lead to a spike in prices. 

As the US is trying artificially hold the price of crude in the international oil market by pushing OPEC/Saudi Arabia, any upliftment of sanction on Russian or Iranian oil may immediately spike the oil price very high, as OPEC will not let their revenue cut due to reduction of capacity in future. Crown Prince Mohammad Bin Salman promised to raise the oil production to 13 million barrels per day by 2027. 

But this is the long-range target. President Biden wanted prices to be moderated before the elections. The overriding concern was to maintain international oil price stable, even if more stringent EU sanctions against the import of Russian oil go into effect.