Oil prices drop as Russia-Ukraine tensions ease

Oil prices drop as Russia-Ukraine tensions ease

The oil market reacted to the news of a diplomatic breakthrough between Russia and Ukraine on Friday, sending crude prices lower as the risk of a military conflict in Europe faded. The market followed the old adage of “buy on the rumor, sell on the news”, as traders had already priced in the possibility of a war that could disrupt oil supplies.

Oil prices had surged to multi-year highs in recent weeks, as Russia amassed tens of thousands of troops near the border with Ukraine, raising fears of a repeat of the 2014 annexation of Crimea. The U.S. and its allies had warned of severe sanctions and other consequences if Russia invaded, while also trying to negotiate a peaceful solution.

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On Friday, Russian President Vladimir Putin and U.S. President Joe Biden held a phone call, in which they agreed to pursue diplomatic talks on the security of Ukraine and Europe. The Kremlin said Putin had received “guarantees” from Biden on some of his demands, such as no NATO expansion to Ukraine and no deployment of offensive weapons there. The White House said Biden had reiterated his support for Ukraine’s sovereignty and territorial integrity, and had not made any concessions to Putin.

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The news of the de-escalation sparked a sell-off in the oil market, as traders unwound their bullish bets and took profits. Brent crude, the global benchmark, fell by 3.6% to $83.18 a barrel, while West Texas Intermediate, the U.S. benchmark, dropped by 3.8% to $79.22 a barrel. Both benchmarks had hit their highest levels since 2014 earlier this week, above $90 and $85 a barrel, respectively.

Analysts said the oil market had overreacted to the geopolitical risk, and that the fundamentals of supply and demand remained supportive of higher prices. They said the global oil market was still tight, as the recovery in demand from the pandemic outpaced the growth in supply from OPEC and its allies. They also said the threat of a Russian invasion had not completely disappeared, and that the diplomatic talks could face challenges and setbacks.

Some analysts also pointed out that the oil market had other factors to consider, such as the impact of the Omicron variant of Covid-19 on demand, the inflationary pressures on the global economy, and the policy responses of central banks and governments. They said the oil market was likely to remain volatile and unpredictable in the coming months.

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Source : The Wall Street Journal

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