In recent weeks, Ukraine’s military has recaptured territory previously occupied by Russia, leaving many surprised by the way the smaller nation has begun repelling invading Russian forces.
More recently, news broke of a “small but symbolic” victory for Ukrainian forces when they captured a village in the so-called Luhansk People’s Republic. This is a significant development because Luhansk is one of Ukraine’s breakaway enclaves, backed by Russia for the last eight years.
This comes nearly seven months into the war, and weeks after rumours of a counter-offensive at Kherson in Southern Ukraine turned out to be a feint for a rout of Russian soldiers from territories in the Kharkiv region, including Izium and the border city of Kupiansk.
On Tuesday, Turkish President Recep Tayyip Erdogan said he believes Russia’s Putin is seeking an end to the war and that a “significant step” will be made.
The Ukraine conflict and the resulting sanctions on Russian oil and gas have resulted in windfalls for oil and gas producers such as those in the GCC as Western states sought to wean themselves off reliance on Russia.
Zawya asked analysts what an earlier-than-expected end to the conflict would mean for oil producers.
Bearish Oil Prices
Ehsan Khoman, the Head of Emerging Markets Research at MUFG, said: “An end to the conflict would be face-value bearish oil prices with the expectation that additional supply would come into global markets.”
At around $95 per barrel, Brent is back to its 15-year average price, adjusted for inflation, and a large demand slowdown is now discounted, he said.
The bank does not anticipate a sustained rally due to “recessionary angst” offsetting the velocity of crude oil’s tightness, yet the risk-reward outlook has improved again, he said.
According to Khoman, permanent structural challenges such as deglobalisation, decarbonisation and rising demand and underinvestment in commodity supply capacity will not be solved in the long term by recessions driven by high prices. These dynamics will resurface as soon as demand recovers, he said, and added that the oil supercycle is only in its first innings.
Prolonged Conflict Base Case
Lombard Odier believes that the conflict will be prolonged and will continue to feed the energy crisis in Europe.
But when asked what the Swiss private bank’s perspective would be if the conflict ends in 2023, Samy Chaar, Chief Economist at Lombard Odier, forecasted oil prices trading near $100 per barrel in 2022, stabilising to $90 per barrel in 2023.
The EU has built up natural gas inventories, he noted, and has implemented state aid, energy saving and taxes on corporate revenues, but the efficiency of its measures will depend on solidarity between member states and willingness to coordinate energy supplies.
“The war will continue to impact the euro area’s growth in the quarters ahead. With high energy prices fuelling inflation, we see the European Central Bank’s interest rates peaking at between 1.5% and 2% by end-2022 and anticipate a 1% decline in eurozone GDP in 2023.”
If interest rates in the US peak below 4%, the bank believes that a mild US recession in 2023 is more likely than a severe one.
GCC Inflation
Of the GCC, he said: “Inflation is a key challenge for the region, like for the rest of the world. While price pressures in July eased in Qatar to 5%, the Kingdom of Saudi Arabia saw inflation pick up to 2.7%. […] despite ongoing price controls for fuel and energy, there are signs global inflationary trends have begun to impact the kingdom’s economy.
“In Dubai, inflation surged to 7.1% in July, the highest level since 2008, and up from 5.8% in June, with transport costs driving over half of inflation. Transport costs rose by 39% year-on-year as the UAE is not subsidising fuel,” he said.
Despite this, Chaar said, the bank anticipated strong growth in the region. “Growth dynamics remain resilient, and the UAE’s GDP, for instance, should expand by around 7% this year, with non-oil GDP forecast to grow by around 4.5%,” he said.
Although he did not comment specifically on how the outcome of the conflict will affect prices, Alexander Perjessy, VP Senior Analyst, Moody’s, observed: “Our current expectation is that oil prices move closer to our medium-term fundamental range of $50–$70/barrel in 2024–25, but we don’t assume that it will actually be inside that range in 2024.”
He added: “If oil prices decline materially relative to our current assumptions, the window of opportunity for the GCC sovereigns to repair their balance sheets and implement further reforms in a supportive macro environment will narrow.”
Source: Reuters (Reporting by Imogen Lillywhite; editing by Seban Scaria)