Russian geopolitics to have limited impact on oil prices, analysts say

However, risk in the country has increased after Saturday's mutiny attempt, Rystad Energy says

People speak with a police officer at the Red Square, in Moscow on June 25. Troops deployed in Moscow the previous day to protect the capital from Wagner mercenaries have withdrawn from the capital, aShow more

An armed insurrection in Russia that has now abated will have a limited impact on oil prices this week, according to analysts.

On Saturday, Russian mercenary forces the Wagner Group withdrew from the southern Russian city of Rostov-on-Don and halted their march on Moscow following a deal, ending what could have been the first coup attempt in the country for three decades.

The mutiny ended as abruptly as it started, with Wagner chief Yevgeny Prigozhin ordering his troops to pull back after reaching within 200 kilometres of Moscow.

“Given that the short-lived event this weekend in Russia appears to have ended, we do not expect to see such a significant increase in oil prices,” Norway-based consultancy Rystad Energy said in a research note.

“We do, however, believe that the geopolitical risk amid internal instability in Russia has increased.”

Brent, the benchmark for two thirds of the world’s oil, was trading 0.43 per cent higher at $74.17 a barrel at 9.58am UAE time on Monday, while West Texas Intermediate, the gauge that tracks US crude, was up 0.39 per cent at $69.43 a barrel.

Both benchmarks shed more than 3.5 per cent last week amid concerns of further monetary tightening by global central banks.

“Oil markets appear to have taken the events in Russia over the last several days in their stride with both Brent and WTI trading up marginally,” said Daniel Richards, Mena economist at Emirates NBD.

“There appears to be no material threat to Russia’s oil production from the political unrest, leaving markets to remain focused on tighter central bank policies and a general slowdown in economic activity,” Mr Richards said.

The International Energy Agency and Opec expect the oil market to tighten in the second half of the year amid Opec+ cuts and a rebound in Chinese crude demand.

However, resilient Russian crude supply and rising output in countries under sanctions, such as Iran and Venezuela, could potentially result in a smaller deficit in 2023, analysts have said.

Several investment banks, including Goldman Sachs, MUFG and UBS, have slashed their short-term oil price forecasts over the past few weeks, citing higher-than-expected crude supply in the market.

Brent has lost nearly 14 per cent of its value since the start of 2023 amid growing concerns of a global economic slowdown.

Much of the oil sell-off over the past year reflects the policy and market response to the jump in prices in the first half of 2022, Goldman Sachs said in a research note on Friday.

Brent surged to nearly $140 a barrel following Russia’s invasion of Ukraine last year, resulting in record releases from America’s emergency crude reserves and aggressive interest rate increases by central banks, the US investment bank said.

Goldman Sachs said that crude production in the US and sanctioned countries had surprised to the “upside”, adding that oil prices would likely not rebound to 2022 highs over the next year.

“Looking at the next few months, the SPR [strategic petroleum reserve] and US shale headwinds should start to turn into moderate tailwinds as the SPR gradually refills while US supply slows,” the bank said.

Meanwhile, global investment in oil and gas projects rose by 8 per cent last year but remained 40 per cent lower than 2014 levels despite the large price increases, Goldman Sachs said.

“The focus shifted from ESG [environmental, social and governance] to energy security, and European majors dialled down their plans to reduce oil production,” the bank said.

The price cap on Russian crude exports, designed to keep barrels on the market while dwindling Moscow’s revenues, may weigh on crude prices in the long run by shifting power from producers to consumers if it turned into a “blueprint” for future sanctions, Goldman Sachs said.

The bank also said that the energy crisis had not resulted in any “significant” damage to crude demand, but noted that rising investment in clean energy and electric vehicles would weigh on oil consumption in the long run.