Prices of energy commodities to remain elevated for months

Russia’s invasion of Ukraine has caused a spike in prices of crude oil, natural gas and liquefied natural gas (LNG). With the war in Ukraine and the resulting stand-off between Russia and the West likely to last for several months, energy prices are set to remain at their current elevated levels for much of the year.

Western governments’ response to the invasion has been significant in terms of sanctions placed on Russian financial institutions and the central bank. However, from the energy sector’s perspective, Western governments are putting in place carve-outs that permit energy trading to continue, in order to protect European countries that depend on Russian gas for their energy needs. Likewise, we do not expect Russia to cut off supplies of energy to Europe, especially as energy exports are one of the Russian economy’s sole lifelines following the imposition of sanctions. 

Even so, energy prices have spiked. Dated Brent blend crude oil is now trading above US$100/barrel, and prices will remain elevated as long as conflict rages in Ukraine. The threat of sanctions being imposed on Russian hydrocarbon exports and uncertainty around the extent to which the armed conflict will constrain supply will put further strain on already-tight markets. Some oil traders are avoiding Russian oil out of concern about secondary sanctions on financial transactions with Russian entities and lack of clarity on which Russian banks will be disconnected from SWIFT, the global payments system. 

The conflict has raised fundamental questions about the security of Europe’s natural-gas supplies from Russia, for which there is no realistic substitute. Europe’s stockpiles are meagre—only enough to withstand up to six weeks of gas supply cuts from Russia—and a move to alternative sources, such as LNG, will take time. Europe is marginally reducing its demand for Russian gas, which along with the imposition of additional sanctions on upstream investment, will mean that Russian output contracts, tightening the market even further. EIU expects global LNG demand to increase significantly in 2022.

Our view is that OPEC+ and the US will continue to increase crude oil output, but that this will not be enough to soften the rise in oil prices in the short term. Eventually, this supply response will put downward pressure on prices from the middle of the year. We expect oil prices to average over US$90/barrel in 2022, about a third higher than in 2021. We expect European natural-gas prices to rise by at least another 50% in 2022, after surging by nearly 400% in 2021. Benchmark Japanese LNG contract prices will increase by about 20% in 2022, after a 27% jump in 2021. 

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