The effect on oil prices of Russia's invasion of Ukraine
Russia's invasion of Ukraine will most likely disrupt crude supplies locally and globally. Russia is the world’s second-largest oil producer. Russia is the main EU supplier of crude oil. To keep it simple, since Russia is invading Ukraine, this will cause major oil supply issues for the EU. If the US and other countries in the Middle East can keep the supply tap open for the EU, then this issue will not be that much of an issue. However, Russia is a major member of OPEC. Russia holds a lot of influence in this organisation. So they could, if they wanted to, pressure other oil suppliers to not supply the EU with oil. This would only be a short-term play. Russia is heavily dependent on oil sales revenue. War is expensive. I do believe the invasion in Russia will most likely be a month max. After that, the war will be finished, but further civil wars and political instability will most likely arise in Ukraine for years to come. This effect will not be big enough, in my opinion, to drive oil prices higher. Henceforth, this oil spike will be a short-term rise.
Furthermore, there is a growing concern about the imbalance between supply and demand following the opening and normalisation of the global economy after the Omicron variant subsided. In February, JP Morgan analysts projected that disruptions to oil flow from Russia could push oil prices to $120 per barrel. Oil prices last week, for the first time since 2014, reached $100 per barrel.
If Russia is backed into a corner, I highly doubt it, they could curb oil exports to their advantage. Previously, Germany delayed the approval of the Nord Stream 2 pipeline from Russia to Europe. As a result, Russia delayed shipments of natural gas. What stops them from doing it now? If they repeat this action, but for their oil exports, this could further lead to a short-term to medium-term rise in oil prices.
The impact of oil prices on the macroeconomy in Russia is also an interesting thing to look at. If the price of oil continues to rise, according to this study (Ito, 2010). Using an unrestricted VAR (vector autoregressive) model, a 1% increase in oil prices contributes to the growth in real GDP by 0.44% in the long run. However, war is expensive, so I doubt the benefits of the increase in oil prices will outweigh the costs of this war. Furthermore, this study reports that there is clear evidence for consistent claims in other literature pieces. Oil price increases are much more important than oil price decreases (Hamilton, 2003).
In summary, now that the war has begun, I only see oil prices spiking in the first couple of weeks of the invasion and not really after that. The US and other countries will likely supply the oil needed to sustain the EU. Winter is over, and the weather is getting warmer. Oil demand will most likely decrease. The major play with crude oil futures is right now. If the war is prolonged, as Sun Tzu states, no country has ever profited from a prolonged war - the oil prices may reach 110–120 in the next six months. Especially if the supply issues are not fixed and the outcome of the war is political instability.
Technical analysis
The Commodity Channel Index is a technical indicator that, as the name suggests, was designed to be used with commodities. If you want to, you can use it for a variety of assets. But I prefer to use it with commodities. It measures the current price level relative to the average price level over a given period. When it passes +/-100, it signals overbought/oversold levels.
However, the CCI is an unbound oscillator, which means there are no upside or downside limits. So, interpreting overbought and oversold levels is subjective. Furthermore, there are two problems with this indicator. First, the indicator does not take into account fundamental events. So, a political event or supply shock will be seen as an overbought level. However, because the CCI is an unbound oscillator, it can continue to rise. Second, unlike chart patterns, indicators lag in time. So, the CCI will take time to show a decrease in price on its CCI values. This means you may be seeing an overbought signal, even after the price has decreased and the price increase is over. Regardless, right now I believe the CCI shows a great piece of analysis - that is the CCI cycle represented by the yellow line. Henceforth, I will still be using it for my analysis.
The CCI indicator data input is Length 20, Timeframe 1 Month. The pink boxes represent overbought and oversold levels with their corresponding price rectangles on the chart. As you can see from the yellow line, the price approximately follows a cycle. Over the last 16 years, the cycles have been reaching lower lows and lower highs. Currently, the rise from the last pink box is not creating a big enough spike in the overbought level in the CCI indicator, suggesting that the price can continue to rise. The CCI is represented by the yellow line, showing that the oil price is following a cycle. After the Russian invasion of Ukraine is over, you can expect the oil price to fall along with the CCI. However, I expect this to be 6 months after the invasion has concluded. This is an important cycle that the price of oil has followed for the last 16 years.
The two orange lines represent all-time highs and lows.
The two red lines represent a "box" of resistance and support. As you can see from Oct 2010 to Aug 2014, for almost 4 years, the crude oil price stayed in this region. This region will provide very important support and resistance to the oil price level if it reaches this point.
Using Fibonacci levels, we can see the oil price has been following a support and resistance pattern equal to the support and resistance of the Fibonacci levels. Right now, it has broken out of the nearest Fibonacci level that rests around $98. This will provide a level of support to the oil price. Along with that, there is another support level represented by the top blue line. Right now, in the event of stalling behaviour, I see the oil price staying between $97 – $105. The price may poke above or below during this time.
However, my confidence level in this support is not too high. The resistance and support levels given by the Fibonacci sequence, the red and blue lines, are strong. But the price range in this region seems too small. So, if the price stays here, it could only be for a couple of weeks to months. Following other price behaviour in the past.
Also, as you can see, the price touched $100 and then fell and has stayed there for the last week. The reason for this is that the $100 price level is a great level of resistance. I wouldn't be surprised if many traders used this price level as their take-profits.
In summary, the invasion of Ukraine has been going on for nearly a week now. The oil price has shot up, but not to a large degree. I'm guessing the supply chain is holding through and the markets have probably priced in this invasion, hence why the price hasn’t shot up that far as you would expect. If the price stalls, it should stay between $98 to $105. The key support and resistance levels. The price, in my opinion, may poke through the lower level if the war seems to be ending or through the top if the war creates problems for the oil market. I don’t see the price going above the bottom red line. Only if there are major supply issues with oil or geopolitical events related to oil. If the price does break the bottom line of resistance, then the price should only be there for a short time and eventually return down. Unless, of course, the geopolitical/supply issue persists, in which case the price is likely to remain above the bottom red line. After that, I expect to see the price of oil decrease and continue in its CCI (yellow line) cycle.
Furthermore, there is a growing concern about the imbalance between supply and demand following the opening and normalisation of the global economy after the Omicron variant subsided. In February, JP Morgan analysts projected that disruptions to oil flow from Russia could push oil prices to $120 per barrel. Oil prices last week, for the first time since 2014, reached $100 per barrel.
If Russia is backed into a corner, I highly doubt it, they could curb oil exports to their advantage. Previously, Germany delayed the approval of the Nord Stream 2 pipeline from Russia to Europe. As a result, Russia delayed shipments of natural gas. What stops them from doing it now? If they repeat this action, but for their oil exports, this could further lead to a short-term to medium-term rise in oil prices.
The impact of oil prices on the macroeconomy in Russia is also an interesting thing to look at. If the price of oil continues to rise, according to this study (Ito, 2010). Using an unrestricted VAR (vector autoregressive) model, a 1% increase in oil prices contributes to the growth in real GDP by 0.44% in the long run. However, war is expensive, so I doubt the benefits of the increase in oil prices will outweigh the costs of this war. Furthermore, this study reports that there is clear evidence for consistent claims in other literature pieces. Oil price increases are much more important than oil price decreases (Hamilton, 2003).
In summary, now that the war has begun, I only see oil prices spiking in the first couple of weeks of the invasion and not really after that. The US and other countries will likely supply the oil needed to sustain the EU. Winter is over, and the weather is getting warmer. Oil demand will most likely decrease. The major play with crude oil futures is right now. If the war is prolonged, as Sun Tzu states, no country has ever profited from a prolonged war - the oil prices may reach 110–120 in the next six months. Especially if the supply issues are not fixed and the outcome of the war is political instability.
Technical analysis
The Commodity Channel Index is a technical indicator that, as the name suggests, was designed to be used with commodities. If you want to, you can use it for a variety of assets. But I prefer to use it with commodities. It measures the current price level relative to the average price level over a given period. When it passes +/-100, it signals overbought/oversold levels.
However, the CCI is an unbound oscillator, which means there are no upside or downside limits. So, interpreting overbought and oversold levels is subjective. Furthermore, there are two problems with this indicator. First, the indicator does not take into account fundamental events. So, a political event or supply shock will be seen as an overbought level. However, because the CCI is an unbound oscillator, it can continue to rise. Second, unlike chart patterns, indicators lag in time. So, the CCI will take time to show a decrease in price on its CCI values. This means you may be seeing an overbought signal, even after the price has decreased and the price increase is over. Regardless, right now I believe the CCI shows a great piece of analysis - that is the CCI cycle represented by the yellow line. Henceforth, I will still be using it for my analysis.
The CCI indicator data input is Length 20, Timeframe 1 Month. The pink boxes represent overbought and oversold levels with their corresponding price rectangles on the chart. As you can see from the yellow line, the price approximately follows a cycle. Over the last 16 years, the cycles have been reaching lower lows and lower highs. Currently, the rise from the last pink box is not creating a big enough spike in the overbought level in the CCI indicator, suggesting that the price can continue to rise. The CCI is represented by the yellow line, showing that the oil price is following a cycle. After the Russian invasion of Ukraine is over, you can expect the oil price to fall along with the CCI. However, I expect this to be 6 months after the invasion has concluded. This is an important cycle that the price of oil has followed for the last 16 years.
The two orange lines represent all-time highs and lows.
The two red lines represent a "box" of resistance and support. As you can see from Oct 2010 to Aug 2014, for almost 4 years, the crude oil price stayed in this region. This region will provide very important support and resistance to the oil price level if it reaches this point.
Using Fibonacci levels, we can see the oil price has been following a support and resistance pattern equal to the support and resistance of the Fibonacci levels. Right now, it has broken out of the nearest Fibonacci level that rests around $98. This will provide a level of support to the oil price. Along with that, there is another support level represented by the top blue line. Right now, in the event of stalling behaviour, I see the oil price staying between $97 – $105. The price may poke above or below during this time.
However, my confidence level in this support is not too high. The resistance and support levels given by the Fibonacci sequence, the red and blue lines, are strong. But the price range in this region seems too small. So, if the price stays here, it could only be for a couple of weeks to months. Following other price behaviour in the past.
Also, as you can see, the price touched $100 and then fell and has stayed there for the last week. The reason for this is that the $100 price level is a great level of resistance. I wouldn't be surprised if many traders used this price level as their take-profits.
In summary, the invasion of Ukraine has been going on for nearly a week now. The oil price has shot up, but not to a large degree. I'm guessing the supply chain is holding through and the markets have probably priced in this invasion, hence why the price hasn’t shot up that far as you would expect. If the price stalls, it should stay between $98 to $105. The key support and resistance levels. The price, in my opinion, may poke through the lower level if the war seems to be ending or through the top if the war creates problems for the oil market. I don’t see the price going above the bottom red line. Only if there are major supply issues with oil or geopolitical events related to oil. If the price does break the bottom line of resistance, then the price should only be there for a short time and eventually return down. Unless, of course, the geopolitical/supply issue persists, in which case the price is likely to remain above the bottom red line. After that, I expect to see the price of oil decrease and continue in its CCI (yellow line) cycle.