Oil prices remain volatile amid Ukraine uncertainty and possible Iran deal

Crude prices fell on Friday with investors flocking to gold as its safe-haven appeal rises

An escalation in the Ukraine-Russia conflict will lead to an increase in oil and gas prices. Getty

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Oil prices fell more than 2 per cent on Friday as news emerged of an imminent deal between the US and Iran, despite the looming threat of an escalation in the Ukraine crisis.

Brent, the global benchmark for two thirds of the world's oil, finished the week at $93.54 per barrel, while West Texas Intermediate, the gauge that tracks US crude, ended at $91.07.

"Reports of US and Iran nearing a new nuclear deal couldn't have come at a better time and oil prices are slipping at the prospect of more than a million barrels of crude re-entering the market," said Craig Erlam, senior market analyst at Oanda.

"In the absence of a deal, we could already be talking about triple-figure oil prices. Of course, the risk of a Russian invasion remains heightened so there's plenty of potential for oil prices to head higher if troops do cross the border."

Brent futures, which had moved up to about $97 a barrel at the end of last week, retreated to about $94 a barrel, Emirates NBD said in a note on Thursday.

“Markets may be taking a breather amid the uncertainty of what will happen in Eastern Europe but the declines may also reflect expectation that the Iran nuclear deal may actually move forward,” Edward Bell, senior director of market economics at the bank, said on Friday.

“Energy traders decided to forget about how tight the oil market remains and took some risk off the table as Wall Street hit the sell button with every risky asset over rising geopolitical concerns,” said Edward Moya, a senior market analyst at Oanda.

US President Joe Biden said on Thursday that indicators point towards a Russian invasion of Ukraine, including signs Moscow is carrying out a “false flag operation” to justify it.

Russia has repeatedly denied it has any plans to invade the country and is calling on the US and its Nato allies to take into account Moscow's security concerns.

Mr Biden's remarks came shortly after Ukraine and pro-Russian separatists allegedly exchanged fire across the front line, in what western officials described as a possible pretext created by Moscow to invade.

The UN's political chief Rosemary DiCarlo said tension was “running higher” in Ukraine than at any point since the last Russian incursion into the country in 2014 and called the deepening crisis “extremely dangerous".

“Oil prices are on sale today and whatever weakness is happening will likely be short-lived. Geopolitical tensions should be bullish drivers for crude prices and the risk of $100 oil is still very high over the short-term if Russia invades Ukraine,” said Mr Moya.

“WTI crude is resting at the $90 level and if the pullback continues, massive support lies at the $85 level. Even if energy traders become convinced an Iran nuclear deal will happen, the oil market is too tight for prices to fall below the mid-$80s.”

An escalation in the Ukraine-Russia conflict will lead to an increase in oil and gas prices on the risk of Russian energy companies being sanctioned, Bank of Singapore said in a note.

“Russia supplies one third of Europe’s energy needs and is the world’s second-largest oil exporter. Limitations on Russian energy exports would lead to significant and sustained spikes in energy prices globally, shifting the costs of western sanctions on Russia to energy consumers in the US and Europe,” said Mansoor Mohiuddin, chief economist at the Bank of Singapore.

If there is only a limited conflict that does not lead to sanctions on Russia’s energy exports, then “financial markets globally may not endure a sustained downturn this year after their initial sharp declines”, he said.

Benchmark crude prices surged by about $15 a barrel in January, breaching the $90 a barrel threshold for the first time since 2014 on tighter supply, growing demand and production constraints.

JP Morgan, the largest lender in the US, predicts Brent will “overshoot” to $125 a barrel this year and $150 in 2023 due to underinvestment in the oil and gas sector. Goldman Sachs expects oil to rally to $100 a barrel by the third quarter of this year.

Gold shines bright

The volatility in the market and rising inflation has pushed investors towards safe-haven assets such as gold, with its price increasing during the past two days.

Spot gold rose 1.5 per cent overnight on Thursday to settle at $1,898 an ounce, Emirates NBD said. It was trading at $1,891 an ounce at 9.39am on Friday.

“A month ago, no one wanted to touch gold. Now gold has suddenly become the flavour of the month … [since] investors are scrambling for safe havens as geopolitical risks intensify and fears grow that the central banks might go overboard with tightening monetary policy,” Mr Moya said.

Gold prices declined more than 4 per cent in 2021 after rising 48 per cent over the previous two years as the global economic recovery reduced demand for the metal.

The safe-haven commodity traded between $1,676 and $1,959 an ounce last year, following its best annual performance in a decade in 2020, when it touched a record high of $2,072.50.

While gold has breached the $1,900 level this year, investors might see further bullish momentum if the Ukraine situation intensifies, Mr Moya said.

“Gold has key resistance around the $1,920 to $1,930 zone but if the haven bid remains strong, bullish momentum could support a move towards the $1,970 level.”

Globally, central bank gold reserves rose to about 35,600 tonnes in 2021, the highest level since 1992, according to the International Monetary Fund.