Broken global supply chains, unprecedented inflation, energy shortages and rising commodity prices. These conditions existed even before Russia invaded Ukraine. Now it seems that everything is getting worse all of a sudden. How long until things return to normal? Geopolitical strategists have come up with hypotheses about how the war could end for the purpose of analyzing the oil market. The important question is whether this will end sooner or later. Unfortunately, this question is difficult to answer, as the answer depends on many factors. And yet there is an even more important question than this: will things ever return to normal?
According to some observers, they will. Energy analyst Michael Lynch, for example, wrote in a recent article for Forbes that sooner or later the war will end and the oil market will return to normal, with prices falling to a more pleasant level.
Among the events he expected, Lynch listed the lifting of Western sanctions against Russia and therefore an almost complete overview of the way the energy world worked before the war.
However, the West has said sanctions will not be lifted simply. In fact, US Secretary of State Anthony Blinken said that even if Russia decided to withdraw from Ukraine, the United States would not lift sanctions. Blinken said Moscow would have to guarantee that it would never invade Ukraine again.
Russia has made it clear that it has no intention of withdrawing or providing guarantees of non-intrusion at this time, so it would be safe to say that the sanctions will remain in place in the future.
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The longer the current situation lasts, the more likely it is to bring about some irreversible changes, such as Europe relying more on liquefied natural gas rather than pipeline imports, and Russia increasingly relying on Asia for its exports. of energy. And oil and gas prices will remain higher for longer.
This seems to be the case in the hypothetical scenario outlined by Lynch on Forbes, in which sanctions are lifted this year. Despite the ensuing return of Russian barrels to Western markets, Lynch noted, OECD oil reserves are 300 million barrels lower than the five-year average, which means prices will remain relatively high until those reserves are replenished.
As prices fall, demand will increase further, despite the fact that it will still be quite high. As Lynch said, “Americans like to burn oil on highways.” And it’s not just Americans.
EV’s sales are currently increasing despite higher prices due to a shortage of battery materials. Global electric vehicle sales rose nearly 120 percent in the first quarter, Reuters reported. And yet this was just the beginning. Prices remain higher and electric cars may become scarce.
Rivian’s chief executive said this week that compared to the shortage of batteries looming on the horizon of EV, the shortage of chips would seem like a “small appetizer” for the industry. “Semiconductors are a small prelude to what we’ll feel on battery cells over the next two decades,” RJ Scaringe told the Wall Street Journal, adding that “90% to 95% of the supply chain.” [for battery cells] does not exist.”
This means that the demand for oil is that it will grow further. In a hypothetical scenario in which the war in Ukraine ends by the end of this year, we will probably see demand return exactly the way it returned after the pandemic. More precisely, it will grow as fast as demand grows after the pandemic. It seems that the war has not destroyed the great demand for oil so far, but only changed the supply patterns. Therefore, oil will remain dominant, even at higher prices.
By Irina Slav for Oilprice.com
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