The global commodities market could be affected by Ukraine’s possible agreement to the US-negotiated ceasefire.
This ceasefire, if implemented, could result in a major shift in the commodity price and trading flows.
In a recent note, Jorge Leon, Rystad’s head of geopolitical analyses, stated that “although still early in this process, energy market implications could be enormous”
Early market reactions this week highlighted an important aspect of oil and gas prices: the current geopolitical premium.
According to Leon, if a truce is implemented successfully, the risk premium will experience a rapid decline. The decline in risk premium would translate directly into a decrease in the price of oil and gas, which will ease current market tension.
It is well established that there exists a relationship between oil and gas price and geopolitical tensions.
A truce, or any other measure that reduces the geopolitical tensions in a significant way can calm down markets.
It lowers geopolitical risks by reducing the perceived threat of disruptions in supply, which leads to an eventual drop in the price of oil and natural gas.
The sanctions on hydrocarbons could be lifted
Leon said that “more importantly, it is now more likely than just a couple of days ago to have a lasting peace agreement, following the famous televised confrontation between President Zelensky in the Oval Office and President Trump,”
A permanent ceasefire would not only have obvious humanitarian benefits but also have global implications on the energy market.
Rystad energy says that a ceasefire will certainly lead to the lifting of Russian hydrocarbon sanctions.
The increased access to Russian supplies will likely have a downward impact on all gas prices, but especially on the Title Transfer Facility benchmark (TTF), which is the main reference for European gas price.
The decrease in price could be due to the increased supply of gas on the market. This would lead to an excess and reduce the scarcity which often leads to increases in prices.
TTF dropped by nearly 13% at the end of February, possibly a sign of President Trump’s confirmation that he had held discussions with Russian president Vladimir Putin.
The discussions were intended to start immediate negotiations to end the conflict in Ukraine.
Oil markets: Impact
A permanent ceasefire could have a less dramatic effect on the oil price.
Although Russia’s crude production has been capped at the OPEC+ level and is not affected by sanctions in any significant way, it is possible to increase production and exports.
It could happen if Russia decided to go over its OPEC+ quota, or if OPEC+ revised the agreement to include a higher Russian production.
Russia could be motivated to raise production by a number of factors, such as a desire for increased revenue, to gain traction on the market, or to exert influence.
A similar move may also prompt a reaction from the other OPEC+ member countries, potentially leading to a war of prices or a collapse in the agreement.
A significant rise in Russian oil production could also face challenges due to limited capacity of pipelines or shortages of tankers.
Leon says:
A lower price of oil could be more favorable for the US in applying maximum pressure to Iran.
Iran: Strategy
According to Leon, the Trump Administration’s Iran strategy could include leveraging global market dynamics in their favor.
The US wants to reduce Iranian oil exports by applying maximum pressure to Iran. This could lead to an estimated loss of 1.5 million barrels a day.
In a low price environment where global oil prices are less volatile, this strategy may be seen as being more viable.
This favorable environment of low prices is due to a number of factors. The OPEC+ Alliance, which includes OPEC and major oil producing countries such as Russia, is increasing its production.
The increased oil supply combined with the growing Russian oil exports creates an excess on the world oil market. This puts downward pressure to prices.
The market may absorb the significant loss in Iranian oil exports without any major spikes.
The Trump administration can continue its campaign of maximum pressure against Iran while reducing the economic impact on the US and allies.
If a peace agreement is signed in Ukraine and Russian gas can be piped to Europe again, global trade could change.
Leon stated that “we are far from an agreement on a ceasefire between Russia and Ukraine but this development offers a glimmer hope.”
As new information becomes available, this post may change.
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