Ukraine’s potential agreement to a US-negotiated ceasefire could have far-reaching consequences for the global commodity market.
If implemented, this ceasefire could lead to a significant shift in commodity prices and trade flows.
“Although still early in the process, the energy market implications of a Ukraine-Russia ceasefire could be huge,” Jorge Leon, head of geopolitical analysis at Rystad Energy, said in a note.
The early market reactions observed earlier this week have highlighted a crucial aspect of the oil and gas markets: the geopolitical risk premium currently embedded in prices.
Should a truce be successfully implemented, this risk premium is expected to experience a sharp decline, according to Leon. This decline would directly translate to a reduction in oil and gas prices, easing the current market tension.
The relationship between geopolitical tensions and oil and gas prices is well-established.
Therefore, a truce or any measure that significantly reduces geopolitical tensions can have a calming effect on the markets.
By decreasing the perceived risk of supply disruptions, it lowers the geopolitical risk premium, leading to a subsequent decrease in oil and gas prices.
Sanctions on hydrocarbons may be lifted
“More importantly, the likelihood of a permanent peace agreement has now increased compared to just a few days ago, after the infamous televised clash between President Zelensky and President Trump in the Oval Office,” Leon added.
In addition to the obvious humanitarian benefits, a permanent ceasefire between Russia and Ukraine would have wide-ranging and sweeping implications for global energy markets.
First and foremost, a ceasefire would certainly entail the lifting of sanctions on Russian hydrocarbons, according to Rystad Energy.
Increased access to Russian gas supplies would likely exert downward pressure on gas prices across the board, with a particularly notable impact on the Title Transfer Facility (TTF) benchmark, which serves as the primary reference point for European gas prices.
This decrease in prices could be attributed to a greater supply of gas in the market, potentially leading to a surplus and reducing the scarcity that often drives price increases.
The TTF experienced a significant drop of nearly 13% in mid-February, potentially foreshadowing President Trump’s subsequent confirmation of discussions with Russian President Vladimir Putin.
These discussions aimed to initiate immediate talks to resolve the war in Ukraine.
Impact on oil markets
The downward pressure on oil prices caused by a permanent ceasefire may be less pronounced.
While Russia’s crude oil production is currently capped by its OPEC+ target, and not significantly hampered by international sanctions, there is potential for increased production and export in the future.
This could occur if Russia decides to exceed its OPEC+ quota or if the OPEC+ agreement is revised to allow for higher Russian output.
Several factors could motivate Russia to boost production, including a desire to increase revenue, gain market share, or exert political influence.
However, such a move could also trigger a response from other OPEC+ members, potentially leading to a price war or a collapse of the agreement.
Additionally, any significant increase in Russian oil exports could face logistical challenges, such as limited pipeline capacity or a shortage of tankers.
Leon said:
Interestingly, a lower oil price might be more conducive for the US to apply maximum pressure on Iran.
Strategy towards Iran
The Trump administration’s strategy towards Iran could involve leveraging the global oil market dynamics to their advantage, according to Leon.
By applying maximum pressure on Iran, the US aims to curtail Iranian oil exports, potentially leading to a loss of around 1.5 million barrels per day.
This strategy might be perceived as more feasible in a low-price environment, where the impact on global oil prices would be less severe.
Several factors contribute to this favorable low-price environment. The OPEC+ alliance, consisting of OPEC members and other major oil-producing countries like Russia, has been increasing production levels.
This increased supply, coupled with growing Russian oil exports, creates a surplus in the global oil market, putting downward pressure on prices.
In this context, the loss of Iranian oil exports, while significant, might be absorbed by the market without causing a major price spike.
This scenario allows the Trump administration to pursue its maximum pressure campaign against Iran with reduced economic repercussions for the US and its allies.
Global trade flows could shift if a negotiated peace is reached in Ukraine, and Russian piped gas may resume to Europe.
“We are still far away from a permanent ceasefire agreement between Russia and Ukraine, but these developments offer a glimmer of hope,” Leon said.
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