Moody’s Analytics: Elevated crude oil prices will lead to demand destruction

KUALA LUMPUR: A much longer-term period of elevated crude oil prices well above the current level would lead to some demand destruction and possibly accelerated investment in alternative sources of energy, said Moody’s Analytics.

Its chief Asia-Pacific economist Steve Cochrane said the hike in global crude oil prices currently is due to heightened risk premiums as a result of the uncertainty in supply.

“But actual supply has not been disrupted. The international sanctions that block some Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system have not been extended to the largest banks in Russia that manage most of the transactions for Russia’s energy industry.

“Our expectation is that if the military conflict does not extend beyond the borders of Ukraine, the sanctions will not be expanded to encompass the remaining Russian banks,” Cochrane told Bernama.

Assuming there are some resolutions in the coming weeks and that it becomes apparent that oil and gas will continue to flow out of Russia, he said the risk premium should diminish and prices should return to their pre-invasion levels.

“If this scenario plays out, the rise in the prices of crude oil should not last long enough to lead to a significant demand destruction for crude, and any higher inflation would also be moderated and short-lived,” he added.

Cochrane said Brent crude is likely to average at about US$92 (US$1=RM4.17) per barrel in the second quarter of 2022 amidst expectations of continued volatility in the energy sector.

For the first quarter of this year, the average price of crude oil is projected at about US$94 per barrel, after starting the quarter at US$79 per barrel.

On March 5, reports said the United States is weighing a ban on the country’s import of Russian crude oil following the ongoing Russia-Ukraine conflict.

At the time of writing, global benchmark Brent crude jumped 6.93 per cent to US$119.10 per barrel, while the US West Texas Intermediate crude oil advanced 7.44 per cent to US$115.70 per barrel. — Bernama