The Wall Street Journal reports,it is characteristic for oil prices to jump at the first whiff of a potential conflict, and Brent crude obliged Monday with a 2% increase, taking it back above $110 a barrel. But Ukraine's crisis is, if anything, likely a bearish development for oil.
Ukraine's own oil supply is negligible. Russia's, at about 11 million barrels a day, is vital. But its sheer size means a broad embargo encompassing all major oil-consuming nations mean that is both highly unlikely and likely unenforceable. If anything, the crisis could encourage a release of strategic oil stocks on the part of the U.S. and allies. In the longer term, it could swing U.S. politicians toward allowing more exports of crude oil.
Meanwhile, the threat to demand is real, and warning signs have appeared immediately. Russian stocks dropped 12% Monday, part of a broader selloff of equities around the world. And yields on havens such as U.S. Treasurys fell.
Crimea has spooked a world that was already nervous, especially about emerging markets reliant on foreign capital flows facing pressure from the Federal Reserve winding down its bond-purchasing program.
That matters because developing markets are projected by the International Energy Agency to account for more than 100% of global oil-demand growth this year; consumption in the developed world is poised to fall slightly. Weaker currencies make oil-import bills higher. In India and Brazil, for example, oil priced in local currency is more expensive than in 2008, when it peaked in dollar terms.
An increasing oil burden on economic growth, predicated on broad geopolitical risk rather than a specific threat to supply, won't offer sustained support for prices. Oil bulls should find the Russian bear lives up to its name.
