Fuel prices have shot up in recent weeks after tough sanctions were imposed on Russian oil and gas companies and their exports by a large suite of countries. The sanctions come in response to Russia’s invasion of Ukraine and are designed to effectively cut Russia off from the global economy and hurt the finances and lifestyles of the politically elite in Russia. But the result abroad is that soaring energy prices have put increasing pressure on households already dealing with a fast rise in the cost of living.

The Brent crude oil benchmark is currently sitting at US$118/bl. Prices have been extremely volatile over the past month, reacting to news coming from the Ukrainian conflict, and changes to sanctions. Prices have ranged from $139/bl to just below $100/bl since the start of March. But as our Chart of the Month shows, oil markets expect to see prices calm down again in short order. We think that’s unlikely.

Futures markets have been predicting a near-term peak in oil prices followed by a steady decline over the next two years, however the peak just keeps extending out. We do expect the peak to be very close if it hasn’t already happened (assuming no more major aggressions occur, or sanctions emerge).

Futures markets currently have oil prices dropping back below $90/bl by August 2022. This oil price moderation may be optimistic considering Russia accounts for 11% of global oil production. With no end in sight for the conflict, and little expectations that sanctions will be removed any time soon regardless of Russian actions, there’s a substantial shortfall of oil into the global system.

There’s some hope for more oil production if the US picks up its shale fracking capacity, OPEC ramps up production under the UAE’s encouragement, and the potential from an Iranian nuclear deal to free up oil currently incapacitated by sanctions. But the last two are reasonably big ifs. However, there has been a structural shift in the expected price path of oil, with Brent now expected to trade at $84/bl at the end of 2022, compared to the $70 thought back in November 2021. War in Ukraine, rebounding economic activity after COVID-19, and supply chain disruptions combine to keep oil prices elevated. Don’t expect lower oil prices any time soon.