Oil prices rose to their highest levels since mid-April on Monday, following a drone attack by Ukraine on a key Russian oil export hub and an extension of production cuts by Saudi Arabia and Russia.
Ukraine launched a naval drone attack on Russia’s port of Novorossiysk, a critical hub on the Black Sea for Russian oil exports, over the weekend.
The port is said to handle about 20% of Russia’s crude oil exports and 40% of its refined products exports. The attack caused significant damage to the port’s infrastructure and disrupted its operations. Ukraine did not immediately respond to CNBC’s request for comment.
The attack came amid escalating tensions between the two countries over Russia’s military buildup near the Ukrainian border and its support for separatist rebels in eastern Ukraine. The United States and its allies have expressed concern over the possibility of a Russian invasion of Ukraine and have pledged to support Ukraine’s sovereignty and territorial integrity.
In addition to the geopolitical risk, oil prices were also boosted by the decision of Saudi Arabia and Russia, the world’s top two oil exporters, to extend their voluntary output cuts until the end of September. Saudi Arabia, the leader of the OPEC cartel, announced last Thursday that it would continue to cut its production by one million barrels per day, while Russia, a key ally of OPEC, agreed to reduce its exports by 300,000 barrels per day in September.
The output cuts are aimed at balancing the global oil market, which has been recovering from the demand shock caused by the coronavirus pandemic. The International Energy Agency (IEA) said in its latest report that global oil demand is expected to grow by 5.3 million barrels per day this year, reaching pre-pandemic levels by the end of 2022. However, the IEA also warned that the spread of the Delta variant and the slow pace of vaccination in some regions pose downside risks to the demand outlook.
Global benchmark Brent crude futures traded slightly below the flatline at $86.17 a barrel on Monday, the highest since April 14. U.S. West Texas Intermediate futures dipped 0.1% to $82.74 per barrel, hovering close to mid-April highs.
Analysts said that oil prices could rise further in the coming months, as supply remains tight and demand recovers from the pandemic. However, they also cautioned that the situation in Ukraine could trigger a sharp reversal if it escalates into a full-scale war or leads to sanctions on Russian energy exports.
