Oil Steady as Sanctions Angst and Lower Stockpiles Set the Tone

Oil prices have been relatively stable in recent weeks, with Brent crude hovering around $80 per barrel, as geopolitical tensions and lower stockpiles shape market dynamics. The Russia-Ukraine conflict, coupled with reduced strategic oil stockpiles, has created a delicate balance in the global oil market.



Geopolitical tensions, particularly the Russia-Ukraine conflict, have been a significant driver of oil price volatility. The conflict has led to widespread voluntary restrictions on imports of Russian crude oil, followed by a formal oil embargo and a cap on the price of Russian crude oil sold to countries not participating in the embargo. These sanctions have reduced the supply of Russian oil, a significant player in the global oil market, contributing to an increase in oil prices. However, the price cap alone did little to lower Russian oil export prices, as Russia was able to circumvent the cap by utilizing a "shadow fleet" to transport its oil (Dallas Fed discussion paper, May 14, 2024).

Lower strategic oil stockpiles have also played a role in stabilizing oil prices. In 2021, the International Energy Agency (IEA) reported that global oil inventories were at their lowest level since 2014, which contributed to a surge in oil prices. As stockpiles were replenished, prices stabilized, demonstrating the impact of stockpile levels on market sentiment (IEA, 2021). The United States, for instance, announced a historic release of 180 million barrels from its Strategic Petroleum Reserve (SPR) in 2022 to help lower gasoline prices and address supply chain disruptions caused by the Russia-Ukraine conflict (U.S. Department of Energy, 2022).

The global geopolitical risk (GPR) index of Caldara and Iacoviello (2022) shows that large spikes in the index, which capture major geopolitical events, are not systematically associated with higher or more volatile oil prices (ECB Economic Bulletin, Issue 8/2023). However, specific geopolitical events, such as the Russia-Ukraine conflict, can have a significant impact on oil prices and market dynamics.

In conclusion, the oil market has been relatively stable in recent weeks, with Brent crude prices hovering around $80 per barrel. Geopolitical tensions, particularly the Russia-Ukraine conflict, and lower strategic oil stockpiles have been the primary drivers of oil price dynamics. While the Russia-Ukraine conflict has contributed to price volatility, the impact of geopolitical risks on oil prices is not always clear-cut, and specific events may have varying effects on the oil market.