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Oil Prices Volatility: How Global Events Shape the Energy Market
A recent report by Moody’s underscores how global tensions, particularly in the Middle East and the ongoing Russia-Ukraine conflict, have led to significant oil price volatility. Geopolitical events, such as infrastructure attacks and threats to major trade routes, can cause immediate and substantial impacts on market stability. We want to explain what this could mean for business energy prices and how the risks could be mitigated.
The Impact of Geopolitical Tensions on Oil Prices
The invasion of Ukraine by Russia in 2022 is a prime example, where oil prices surged by 33% within ten days due to the anticipated severe sanctions on one of the world’s largest oil producers. These fluctuations are primarily influenced by market perceptions of supply disruptions versus demand reductions. When significant oil-producing regions are involved, prices typically increase, whereas issues in major consumer markets may lead to a decrease.
OPEC's Role and Impact on the Energy Market
The Organisation of the Petroleum Exporting Countries (OPEC) plays a pivotal role in the global oil market, significantly influencing oil prices through its production decisions. By coordinating the oil output of its member countries, OPEC aims to balance global supply and demand, thereby stabilising prices. This coordination is crucial during periods of geopolitical tension and economic uncertainty, such as the recent war in Ukraine.
OPEC’s actions, such as production cuts or increases, can lead to substantial shifts in oil prices, affecting everything from petroleum prices at the pump to the profitability of oil-dependent industries. Additionally, OPEC’s strategic decisions are closely watched by investors and policymakers worldwide, as they provide crucial signals about the direction of the energy market. Through its efforts to maintain market stability, OPEC not only impacts the economic landscape but also plays a key role in shaping global energy security.
Rising Energy Prices
The ripple effect of rising oil prices extends to the broader energy market. As oil prices climb, the cost of energy production increases, leading to higher energy prices for consumers. Reports suggest that oil costs will increase by 33% over the next three years, as the non-commodity charges added to electricity bills have climbed. Prices have gone from being approximately £100 per MWh in Q1 2023 to £112 in Q1 2024, and are projected to reach around £132 by Q4 2025.
The positive news is that these costs will eventually decrease once we achieve sufficient low-carbon generation and establish the necessary supporting infrastructure. However, this will take some time.
This escalation affects everything from household energy bills to industrial production costs, contributing to overall inflationary pressures. The prediction for the coming months indicates a continued rise in energy prices, driven by ongoing geopolitical instability and the resultant uncertainty in oil supply chains.
We spoke with Matthew from our Sales Team, who constantly monitors trends and price fluctuations, to get his insights on market volatility:
"Although the market has stabilised in relation to the UK Wholesale Price for Gas and Power throughout the beginning of 2024, there is still an element of concern around how volatile the market could be in the event of any unforeseen circumstance.
As demand in the winter months increases, suppliers are predicting this will negatively impact their pricing, therefore the end user will face higher pricing, as suppliers build more risk into their costings to cover any shortfalls from potential wholesale price increases.
The UK market is still largely dependent on imports of oil, gas, and power which runs the risk of external issues impacting the end user here in the UK. Monitoring the news and reports filtering through from Europe allows us to stay ahead as best we can, and advise our clients of the current position and when would be best to secure a price moving forward.”
Strategic Insights and Risk Management
At BP Consulting, we recognise the importance of understanding these dynamics for our clients. By closely monitoring geopolitical developments, we provide strategic insights and risk management solutions tailored to navigate the complex and volatile energy landscape. Our goal is to help our clients minimise their exposure to price swings and make informed decisions to maintain stability in their operations.
Predictions for Future Trends
Looking ahead, the energy sector must brace for continued volatility. Analysts predict that oil prices will remain susceptible to geopolitical instability, with potential for further price increases if tensions escalate. This persistent instability underscores the need for robust risk management strategies and a proactive approach to monitoring geopolitical events.
Contact BP Consulting today to learn how our strategic insights and risk management solutions can help your business stay ahead in these uncertain times. Reach out to our team for more information and personalised support for your organisation’s needs!