Oil prices approached $100 a barrel on Tuesday, the highest in more than seven years, and European gas futures briefly jumped more than 13 percent, amid rising concerns over armed conflict in Ukraine after the Kremlin ordered Russian troops into separatist territories late Monday.
The price of Brent crude, the international benchmark, neared the $100-a-barrel mark on Tuesday before easing off to about $97 a barrel, a 2 percent increase. West Texas Intermediate was trading at nearly $94.00 a barrel, up about 3 percent.
European natural gas futures are especially sensitive to the latest news, because Russia provides more than a third of Europe’s supply, with some of it running through pipelines in Ukraine. Dutch front-month gas futures jumped 13.8 percent when trading started on Tuesday, then eased a bit to about 80 euros a megawatt-hour, up almost 10 percent.
After oil prices spent a week more or less flat, uncertainty has gripped the markets in recent days. Prices went higher on Sunday as more troops massed at Ukraine’s border, then fell again as diplomatic solutions seemed more plausible.
An invasion could interrupt Russian natural gas and oil shipments to parts of Europe and then be followed by a decline in purchases of Russian energy by the West. Russia produces about 10 percent of world oil supplies and, in recent years, about one-third of Europe’s gas. In recent months Russian gas flows to Europe have dropped sharply, with much of the shortfall made up by liquefied natural gas shipments from the United States and elsewhere.
Understand Russia’s Relationship With the West
The tension between the regions is growing and Russian President Vladimir Putin is increasingly willing to take geopolitical risks and assert his demands.
A key issue is how far the West would go in imposing sanctions that might crimp Russia’s oil and gas business, which is critical to the nation’s economy and a major source of revenue for the Kremlin’s budget.
Analysts say that Western nations may try to avoid hitting oil and gas exports because of the potential impact on world energy markets, especially in Europe, which is already struggling with high prices for gas and electricity.
But some of the financial sanctions being considered, including restrictions on dealing with major Russian banks, could disrupt Western payments for the oil and gas, which account for about half of the country’s exports.
In addition, sanctions could create difficulties for Western oil companies with interests in Russia. The list of such assets is extensive. Shell, Europe’s largest oil company, has a stake in a liquefied natural gas project on Sakhalin Island off eastern Russia. Exxon Mobil is a partner in an oil facility in the same area. TotalEnergies, the French giant, participates in a liquefied natural gas operation in the Russian Arctic. BP has a nearly 20 percent share in Rosneft, Russia’s national oil company.
“Some of the financial sanctions under consideration in Washington could make it challenging for” such companies to continue operating in Russia, wrote Helima Croft, an analyst at RBC Capital Markets, an investment bank, in a note to clients.
In the event of a disruption in energy supplies, the United States and many other industrialized countries would most likely consider releasing millions of barrels of oil from their strategic reserves in an effort to offset any shortfalls. Washington would also lean on those oil-producing countries, including Saudi Arabia and the United Arab Emirates, that are believed to have capacity to increase production.
There is also talk in Washington of suspending federal taxes on gasoline, which could help restrain prices at the pump, at least for a short time.
Consumers in the United States are already feeling pain from higher prices, along with their counterparts in Europe. The average national price of a gallon of gasoline rose nearly 4 cents over the last week to $3.53, roughly 90 cents higher than a year ago. Gasoline prices at the pump usually follow global oil price trends by a week or two.