Oil prices surged in Asian trade yesterday as Ukraine’s Western-backed government mobilized the army with Russia poised to invade, while Russia’s central bank hiked its main interest rate in an emergency move to limit the potential economic damage.
New York’s main contract, West Texas Intermediate for April delivery, gained US$1.14 to US$103.73 in afternoon trade, and Brent North Sea crude for April jumped US$1.62 to US$110.69.
Lawmakers in Moscow voted on Saturday to allow Russian President Vladimir Putin to send troops into Crimea, a predominantly Russian-speaking peninsula in the southeast of Ukraine following the ouster of its pro-Russian government last week.
In what has become the most serious crisis since the end of the Cold War, global leaders condemned the move as Ukrainian Prime Minister Arseniy Yatsenyuk warned: “We are on the brink of a disaster.”
Desmond Chua, market analyst at CMC Markets in Singapore, said that the escalating tension in Ukraine was providing strong support for oil prices.
“Considering that Ukraine is part of the supply chain for Brent, we are looking at this pent-up risk premium resulting in overshooting prices,” Chua told reporters.
“Right now we would have our eyes on Ukraine, on the situation in Crimea... I do think that at least for the next couple of days this situation will be superseding any other market data,” Chua added.
JP Morgan Commodities Research analysts noted that Ukraine is neither a major oil producer nor oil consumer, but said it is an important transit country for Russian energy exports.
More than 70 percent of Russia’s gas and oil flows to Europe pass through its territory. In turn, Europe is the buyer for nearly 90 percent of Russia’s oil exports.
Meanwhile, the Bank Rossii (Bank of Russia) yesterday raised its main interest rate to 7 percent from 5.5 percent in a clear bid to support the ruble and stem an already alarming capital flight amid the tensions between Russia and Ukraine.
“The decision is aimed at averting the appearance of risks for inflation and financial stability linked to the increased volatility on financial markets,” it said in a statement, adding the hike were to take effect from 7am GMT yesterday.
Russian Deputy Economy Minister Andrei Klepach said the decision was less linked to inflation than the “pressure on the ruble and the hysterical situation surrounding it.”
Both of Russia’s main stock markets had earlier opened sharply lower and the ruble hit historic lows against the US dollar and the euro in a widely expected reaction to Russia’s plan for military intervention in Ukraine over the situation in Crimea.
The MICEX stock market in Moscow was trading down 8.35 percent while the RTS bourse had fallen by 9.70 percent at around 0945 GMT.
The ruble has already been under major pressure in recent weeks due to investor nerves about emerging markets and Russia’s flimsy medium-term growth prospects.
However, the Ukrainian crisis yesterday pushed it to levels not seen even in Russia’s 2009 financial crisis that followed the collapse of Lehman Brothers and war with the Georgia over the region of South Ossetia.
The ruble plunged in value to trade at more than 50.2 rubles to the euro. On Friday last week it stood at 49.578. It was a similar story with ruble-dollar trade, with US$1 worth 36.45 rubles. At close of play on Friday it was 36.283.