Analysis: Russia-Ukraine peace deal uncertainty fuels volatility in energy markets

Volatility in energy markets, especially oil prices, is far from over amid the uncertainty surrounding the peace deal between Russia and Ukraine. 

Last Friday, the West Texas Intermediate oil prices fell to their lowest level of $56 per barrel in a month after having traded close to $61 earlier in the week. 

Last week’s selloff came as traders took in the news of an agreement, drawn up by the US, which had the potential to end the war between Russia and Ukraine. 

Potential peace deal 

Energy markets responded to the potential geopolitical breakthrough with a dip in both oil and gas prices, followed by a quick reversal.

The WTI prices were down 0.7% at $57.69 per barrel, while Brent was at $61.57 a barrel, down 0.4%. 

It seemed Ukraine had finally achieved significant input, managing to engineer substantial changes to a deal initially perceived as heavily favouring Russia.

Meanwhile, on Tuesday, US President Donald Trump indicated he would not adhere to the Thursday deadline for Ukraine to accept a US-supported peace plan. 

He also dismissed a report alleging that US negotiator Steve Witkoff had advised Russian counterparts on how to engage with him regarding the matter.

While flying to Florida for Thanksgiving on Air Force One, Trump told reporters that US negotiators were advancing in talks with Russia and Ukraine.

He noted that Moscow had agreed to certain, unspecified concessions.

Volatility to continue

“Crucially, the devil is still in the details,” Jorge Leon, head of geopolitical analysis at Rystad Energy, said in an emailed commentary. 

Several significant matters, such as security guarantees, territorial arrangements, and implementation timelines, will likely necessitate multiple further revisions, according to Leon. 

Most importantly, despite some media reports of Ukraine's preliminary agreement, the world awaits an official response from both parties.

Comments from Russian Foreign Minister Sergei Lavrov and other early indications suggest that Moscow may reject the revised proposal.

According to Lavrov, a fundamental change in the situation would occur if the plan were to eliminate key understandings.

The uncertainty surrounding the whole peace deal narrative spells more volatility for energy markets. 

Leon said:

“With several core issues unresolved and fighting still ongoing in parts of Ukraine, any new information from Kyiv or Moscow can move markets sharply in either direction,” he added. 

Oil supply

“If a peace agreement is reached, the oil sanctions against Russia could also be lifted,” Carsten Fritsch, commodity analyst at Commerzbank AG, said. 

The recently implemented US sanctions, which targeted Russia's two largest oil companies and took effect last Thursday, have had a significant impact. 

These measures prompted refineries in India and China to cease purchasing Russian oil.

Consequently, Russian oil exports have decreased, leading to an increase in Russian crude oil being stored aboard tankers at sea.

Fritsch said:

The mutual attacks between Russia and Ukraine targeting energy infrastructure would likely cease.

Notably, the strikes on refineries have already significantly disrupted Russian oil supplies, particularly oil products.

"The sharp decline in the gasoil crack spread, which has fallen by USD 10 per barrel since last Thursday's high, is likely to be largely due to hopes that the war in Ukraine could soon come to an end," Fritsch said.

Limited scope for higher Russian oil supply

“However, even if US sanctions were eased, a significant increase in Russian oil supply would not be expected, as Russia is bound by OPEC+ production targets,” Fritsch noted. 

The increase is estimated to be 200,000 barrels per day, according to the latest figures from the International Energy Agency. 

In contrast, estimates from the Organisation of the Petroleum Exporting Countries and S&P Global Commodity Insights suggest a lower increase of around 100,000 barrels per day.

IEA estimates indicate that Russia's current production capacity falls short of the agreed production level.