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Global: A few points on oil

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Although Russia’s statements that it will continue the talks bring forward the possibility of partial cooling in the Ukraine crisis, the general picture still has not turned positive. While the United States has warned that Russia may soon invade Ukraine, Moscow’s continued diplomatic attempts make things unclear. Therefore, there are wide possibilities, from the possibility of a large-scale military operation to inaction that will remain at the level of a war of words.

 

Conflict anxiety is causing the markets to remain in the fear pricing zone. Therefore, there is no full recovery yet. Oil and gas prices will rise sharply in cases such as Russia starting a major operation, the West’s financial practices such as keeping Russia out of SWIFT, and the energy flow from Russia to Europe is cut off. If we move from worry pricing to pricing a full supply constraint reality, the equilibrium point of the market will move further away. The rise of oil to levels such as 120-130 dollars in the catastrophic scenario makes it difficult to control the inflationary effects, increases the risk of a hard landing in the economy as it will stop production in the industry, and increases the probability of policy mistakes by Central banks trying to maintain balances.

 

Brent and WTI oil comparison… Source: Bloomberg

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The sharp rise in prices in the short term is a factor that increases the cost in terms of hedging. Considering that in the real economic situation, unpredictable prices are created on the axis of long-term contracts, especially in the energy market, the predictability of future maturities is important for the buyer and for the seller. A volatile price mechanism will not work for anyone. Of course, the increase in the price of oil alone in a fixed-variable market is positive for the producers. However, if very high prices are caused by a supply interruption, the income from prices will not increase at the same rate. The reason is that there is a little more flexibility in demand compared to the past. This is not today’s risk, of course, but it will make plans that will put strategic change forward. Reducing reliance on Russian energy resources can also be a perspective in the green transition. The importance of investments such as convertible energy and electric vehicles will increase much more in the coming years than it is now.

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