Russia–Ukraine tension-driven oil spike to badly hurt Sri Lanka’s prospects

The border tensions between Russia and Ukraine and the tight supply from OPEC + could further pressure global oil prices which topped US$ 90 a barrel fortnight ago hitting a seven-year high, according to ICRA Lanka.

OPEC and its allies identified as OPEC +, which includes Russia, are scrambling to keep up with promised output increases due to years of under investment. 

The net-zero carbon emission goal has also sent US drilling to record lows as many energy firms are focused on returning money to investors rather than boosting output.

The US gasoline prices soared 40.5 percent and energy prices surged by 27 percent in the twelve months to January 2022 as the US is battling its higher consumer inflation in four decades under the current Biden administration.

And more recently, the aggression between the United States led European allies and Russia over a potential invasion of Ukraine by Russia has sent jitters through  global oil markets.

In a note to its clients on February 11, JP Morgan Global Equity Research forecasted oil prices could hit US$ 125 a barrel in 2Q assigning more than US$ 30 a risk premium for an oil barrel.

Oil price at the Brent futures exchange, the global benchmark for oil, ended US$ 93.61 a barrel, losing 1.57 percent for the week.

However, the prices have added 20.11 percent year-to-date and 48.97 percent during the last 12 months predominantly due to the robust demand for oil from all over the world as the economies re-opened after COVID protocols.

Sri Lanka is particularly in a tight spot with its bleeding current account of the balance of payments.
“The month ahead will center around several topics; domestically from inflation worries to internationally, Ukraine crisis”, ICRA Lanka said.

“The Ukraine crisis will have a major bearing on energy prices in the global markets. Rising oil price is already hurting the bleeding current account of the country. Rapid rise in oil prices may further burden the economy,” the rating agency said as part of its outlook for the economy in its latest economic review.

Under these circumstances it will certainly be a tightrope walk for the Central Bank to navigate through the price pressures, external sector liquidity crunch and maintaining at least a modest growth in the economy.

“In this setting, the main challenge for the Central Bank is how aggressive it can be against inflation without upsetting the general functioning of the economy,” ICRA Lanka said.