The Ukraine War 'Can't' Help Uganda's Oil - Experts

The steady rise in prices since mid-last year had been attributed to a global recovery in demand, as countries reopened up their economies after disruptions by COVID-19. China was leading this demand, according to reports, as the industrial sector there returned to full life.
NS Champion Denied Docking by UK Authorities in Orkney Island. Courtesy photo

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Just over three weeks ago, fuel prices were on the rise around the world and a barrel of crude had jumped from under 50 US Dollars to more than 70 US Dollars.

The steady rise in prices since mid-last year had been attributed to a global recovery in demand, as countries reopened up their economies after disruptions by COVID-19. China was leading this demand, according to reports, as the industrial sector there returned to full life.

The oil producers’ cartel, OPEC and its allies like Russia, agreed under the OPEC+ partnership to cut supplies to record low levels during the COVID-19 pandemic-induced lockdowns as demand plummeted.

But as the demand started rising again, OPEC+ agreed to increase output by 400,000 barrels per day every month. However, this served to only slow down the rising prices of crude, but not to stop them.

The barrel then hit 80 US Dollars in January, before the Russian invasion of Ukraine in February. In two weeks of the invasion, the prices jumped to more than 130 dollars a barrel as speculation grew over the uncertainty of Russia exporting oil.

This should ordinarily have led to the high profitability of the oil and gas companies, and subsequently sharp gains in the stocks around the world because investors are attracted by profit. However, investors are also attracted by predictability, stability and certainty, which could not be guaranteed in the European markets.

So, as crude oil prices rose, stocks of oil and gas companies have been volatile, but largely downward. 

Russia is the second-largest producer of oil with 9.8 million barrels per day, following the US, with 11.3 million barrels, and ahead of South Arabia (9.2 million barrels), while the three countries account for 40 per cent of global production.

Russia is also an important global player in the production of finished petroleum products. 

An embargo or a withdrawal from production by any of them will disrupt the global industry, oil being a global commodity trade. At full capacity, Uganda would be producing 230,000 barrels per day and would be 32nd.

The invasion of Ukraine by Russia was followed by economic sanctions which saw major oil and gas investors withdraw their participation in Russia’s industry, led by Shell and BP of the UK. Since late February, a Russian oil tanker, NS Champion has been denied docking at several ports, with would-be buyers apparently shunning it.

Norway's energy giant Equinor agreed to begin exiting joint ventures in Russia and halt new investments there.  French giant, TotalEnergies, said it was halting new investments in the country, US-based ExxonMobil and Italian energy group Eni, also announced the suspension of investments. This increased the pressure on global prices. The complexity of the situation makes it hard to even tell when retail prices of oil (at the pump station, might start falling.  

The Economic Policy Research Centre at Makerere University attributes the current general rise in prices to a combination of factors, but mainly the global recovery from the Covid-19 effects, leading to rise in demand.  

“Similarly, for fuel, the OPEC prices for crude oil has increased significantly mainly because of increasing COVID-19 vaccination rates, relaxation of containment measures, and a global economic rebound that resulted in the worldwide petroleum demand rising faster than supply,” says EPRC in a statement.

The Russia-Ukraine conflict is only abetting the already bad situation, because the affected region is a major producer of both oil and agricultural commodities, like wheat and sunflower, a major input for vegetable oil. “The sanctions placed on Russia will severely affect the prices of key commodities, notably oil and gas,” says the EPRC. Crude oil acquired expensively means will lead to a higher prices finished product.

The higher priced finished product (fuel) will be used to transport crude to the refineries and the finished products to the consumer markets. It is also true however, according to experts, that oil companies will also take advantage of the assumed oil scarcity to raise prices of the product at all levels.

"We cannot allow big oil companies to continue to take advantage of the war in Ukraine and inflation to make huge profits by jacking up gas prices. Over the past 5 days, the average wholesale gas price has gone down by 21 cents a gallon and the price of oil has gone down by over $15 a barrel.

Meanwhile, the average price of a gallon of gas at the pump has gone UP by 21 cents a gallon. We need a windfall profits tax," says US Senator Bernie Sanders. Economist Dr. Fred Muhumuza says the situation is just unfolding, and the people that influence the value chain will have to look for safer areas to put their money.

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And to-date, the OPEC+ leaders have decided to stick to their oil plan of increasing output, with the next increase of 400,000 barrels per day expected in April, despite the skyrocketing prices. Following the talks between the two countries at war on Monday, crude prices dropped to below 100 US Dollars, with the Ukrainian President and experts indicating that the negotiations were becoming substantive.

The price drop was also partly attributed to the new COVID-19 lockdown measures in China which have affected Wuhan city and the surrounding Hubei Province. U.S. shale companies like Diamondback Energy, Continental Resources and EOG Resources are becoming the new production influencers for the global oil market, rising to compete with major producers Russia and Saudi Arabia.

Shaling of oil is unconventional oil production from oil shale rock fragments, by basically fracturing the rock (fracking) to extract the product.

It is quicker to get onto the market because this system produces oil that oil can be used immediately as a fuel or upgraded to meet refinery feedstock specifications by adding hydrogen and removing impurities such as sulfur and nitrogen.

It has attracted giants like Exxon Mobil, Chevron and Royal Dutch Shell, which are heavily investing in the activities.

On whether investors moving away from Russia would channel their money into Uganda’s oil and gas industry as an alternative, Dr. Muhumuza thinks otherwise.

He says that instead, the investors are looking for a quick solution to cover the gap created immediately and that this might instead affect Uganda, whose oil is expected in 2025 at the earliest.

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Whether this slowdown or decline in prices will hold will depend on how the conflict goes on and if the oil producers continue raising production, according to analysts.

This would then give hope for petroleum importing countries like Uganda of easing pump prices.  

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