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Boycotts on Russian oil are unlikely to adversely impact global oil prices

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Boycotts on Russian oil are unlikely to adversely impact global oil prices. PHOTO | POOL

Oil markets always brace themselves against geopolitics as they react to impacts on global oil supply and demands, with prices fluctuating either way.

As we close the year, the West has decreed a price cap of US $60 per barrel on Russian crude oil sold into global markets, with the intention of reducing Russia’s oil revenues and capacity to fund its war in Ukraine.

This is happening at a time when global prices are low at US $80.

How global prices will react to the “political” price cap is a function of many happenings around the world which directly and indirectly impact oil markets.

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With limping world economies and weak oil demands across the world, pressure on prices will remain low.

China, the largest oil demand swinger, has its oil demands taking a toll as the country struggles to contain Covid.

The northern hemisphere is in winter and demands for transportation fuels (petrol and diesel) are currently weak.

On the supply side, although there is not much new oil production coming into the market, global supplies appear balanced.

OPEC+ oil producers continue to control production to strengthen prices, with a few of them discounting prices to niche customers to protect market shares.

The above supply and demand scenarios point to a downward tendency for oil prices.

From my observations over the past eight months of economic and energy sanctions by the West on Russia, the capping of oil at US $60 is unlikely to have a major impact globally.

Russia has perfected the art of dodging sanctions and will hit back at Europe with severer energy supply restrictions with crippling economic impacts.

As has been happening, the USA will be a major benefactor of the sanctions as it will supply European oil deficits.

Further, with the main importers of Russian oil (China, India, Turkey etc.) not participating in the boycott or price caps, most Russian oil will continue to flow into the world.

Supply chains will re-arrange themselves to deliver the same oil, at a freight premium.

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My assessment is that the price cap will be difficult to enforce, and as long as global demands remain subdued, prices will remain in low at US $80 or below.

Energy and specific oil have become a global political and diplomatic tool which is not reflective of free markets. As long as the world remains polarized, prices will remain captive to geopolitics.

In Kenya, pump prices will mostly remain stable, except for the effect of shilling depreciation and government actions on subsidies.

George Wachira is a petroleum consultant.

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