Empirical evidence of the last few months suggests that whenever oil and equities decouple, the former is influenced by supply-side developments. Yesterday stock markets rallied hard, bond yields tumbled, and the dollar strengthened. The return of risk appetite was the result of yet another U-turn in the US tariff charade. It took Donald Trump two days to reverse its decision to punish EU goods shipped to the US with a 50% excise duty and extend the deadline from June 1 to July 9. Why? Because of a ‘very nice’ call with the European Commission leader, Ursula von der Leyn. We suspect the real reason was the relentless rise of US borrowing costs as investors demanded to be rewarded with higher yields to take the risk and lend money to the US government amidst tax cuts and economic uncertainties, that are Mr Trump’s tariff policies.
Despite the potentially temporary relief oil refused to join the risk herd and focused on the possibly third consecutive monthly increase of 411,000 bpd in the OPEC+ group’s output level to be decided at the end of the week. The fact that there was no fallout after the fifth round of nuclear talks between the US and Iran ended in Rome on Sunday was also taken as a sign that the Persian Gulf OPEC member is one step closer to having sanctions lifted. The downside, however, was and is limited by production shutdowns and evacuations in Canada’s Alberta province precipitated by a wildfire, by chatters of further sanctions on Russia, and a ban on Venezuelan oil exports. It is worthwhile noting, that apart from the change in the OPEC+ strategy of prioritizing market share at the expense of tightening the oil balance, which will physically increase oil supply, at least in May and June, the price movements affected by tariff or nuclear talks are based on perceptions, which swing at the whim of the US President. Sentiment, nonetheless, is a powerful price driver and is expected to shape investors’ thinking on a day-to-day basis going forward.

Grim Ukrainian Prospects

It was meant to be a blitz lasting no longer than a week. Now Russia’s invasion of Ukraine is in its fourth year. It is well-documented whence the crisis originates; it is less conspicuous whither it goes. According to the official Russian narrative, the primary objective has always been the de-militarization and de-Nazification of Ukraine (its leader is Jewish). In reality, Russia vies to re-establish the pre-1990 state of affairs, expand its sphere of influence to the West, hinder the expansion of NATO (its aim has backfired as Sweden and Finland have joined the alliance recently) and prevent its western neighbour from aligning with the European Union. Whether these are noble or abhorrent objectives depends on one’s view. What is, nonetheless, beyond doubt is that the invasion is a unilateral Russian aggression whereas the potential Ukrainian membership of NATO or its integration in the European common market would be based on mutual agreements with no coercion from the parties involved.

The outcomes of the war remain ambiguous although with Donald Trump back in the White House the odds seemingly favour Russia in succeeding to achieve its ultimate goals and Ukraine might cease to exist as a sovereign state. The eventual (geo)political and economic landscape almost entirely depends on the military conclusion of the war. It might end in an unexpected Ukrainian victory, Russia claiming its already occupied Ukrainian territories or maybe more or a negotiated settlement. The end of the conflict, whenever it arrives, is partly but not exclusively shaped by Western support for Ukraine. The alignment of the EU and the unconditional solidarity of Europe is unquestionable as the old Continent provides military training and assistance, financial support and sanctions Russia.

The US’s role in the Ukrainian war is perpetually evolving. One might go as far as to say that it is predominantly transactional as manifested in the natural resource deal signed with Ukraine to develop and monetize Ukraine’s mineral sector. Notwithstanding the agreement, the US stance is visibly less promising than that of Europe. The shameful dressing down of the Ukrainian President in the White House, and the temporary suspension of military aid and intelligence sharing are the prime examples of the more nuanced US approach towards Ukraine. In fact, the US President, beyond harsh rhetoric, has not tightened the sanction screw on the invader and has not condemned Russia explicitly for the war. The Russian President feels emboldened by the tepid US involvement and justifiably believes that time is on his side when refusing to negotiate a potential peace agreement. The outlook for Ukraine will considerably deteriorate if or when Donald Trump, as hinted last week, walks away from the conflict, which would be a tacit admission of failing to honour his campaign pledge to broker peace between the warring nations.

An ultimate Russian victory would re-write the geopolitical play and would further encourage Russia to make territorial demands for its former republics, possibly Moldova or Georgia, or maybe even for the NATO member Baltic states. The new status quo would not be lost on China with all its territorial ambitions of Taiwan whilst the US, extending its sphere of influence and strengthening its national security could re-visit its claim to annex Greenland.

Depending on the outcome of the war, sanctions might be lifted or intensified against Russia, yet it would probably not upset the global oil balance tangibly. Russian oil supply has not been meaningfully impacted by the war and sanctions as the country effortlessly found buyers from friendly nations after Europe cut its dependence on Russian oil in the aftermath of the invasion. OPEC put Russian liquid production at 9.95 mbpd in December 2021 compared to 9 mbpd last month but this deficit is more of the function of the OPEC+ quotas than a lack of willing importers.

The same goes for natural gas. Russian exports to its biggest trading partner, the EU, have dropped significantly and whilst Europe relied on Russian imports for 45% of its needs in 2021, this share was only 19% in 2024. Russian gas is being replaced by Middle Eastern, North African, and above all, US LNG shipments whilst the country’s gas export volumes are now flowing east.

Even in case of an unconditional Russian victory, whatever shape it would take, the impact on oil is expected to be minimal whereas the geopolitical script will most likely be re-written with all the negative economic repercussions on the global economy.

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