Oil prices peak after the outbreak of the war between Russia and Ukraine?The problem seems anachronistic now. After all, Brent has soared close to the $100 mark since February 2022 as fears of a war between Russia and Ukraine continue to grow. Given that global crude oil supply continues to lag behind the strong growth in demand, many foreign institutions, such as BofA and JPMorgan Chase & Co, expect Brent oil prices to rise above $120 in the event of war.

However, over the past half a century, whenever Russia waged a military war against neighboring countries, we can indeed see the peak of oil prices.Judging from the history since 1970, Russia (Soviet Union before 1991) has waged a total of five large-scale wars, with the exception of the two wars against Chechnya within the Russian Federation in 1994 and 1999, the other three wars against neighboring countries witnessed the peak of oil prices in each big bull market (figure 1).

We might as well take a look at the trend of international oil prices before and after these three wars:

The Soviet Union invaded Afghanistan in 1979:On December 24-26, 1979, 80,000 Soviet troops assembled on the Afghan border and launched a decade-long invasion of Afghanistan on December 27. Before the war, international oil prices experienced a surge, from $12.66 in early 1978 to $40.75 in November 1979, an increase of 222%. However, international oil prices peaked in the month when the Soviet Union invaded Afghanistan and rebounded by 69% in the following year.

2008 Russian War in Georgia:August 8, 2008 coincides with the opening of the Beijing Olympic Games, but Russia sent troops to South Ossetia on that day to engage in a head-to-head exchange of fire with Georgia. The war comes after international oil prices hit a century high of $147.5 in July 2008. Although the war lasted only 10 days, it was from the month of the war that international oil prices witnessed the sharpest decline under the financial crisis.

Russia annexed Crimea in 2014:On March 18, 2014, Russian troops infiltrated Crimea and combined with information network warfare, annexed Crimea in a bloodless way, which shocked the Western world. Although the impact on international oil prices during this period is limited, Brent oil prices have been fluctuating above US $100 since June 2013, but after the Crimea incident, international oil prices were running out of steam and soon began to plummet under the OPEC price war.

The above review shows that international oil prices did peak before and after Russia's foreign war, and we do not think this is an accident.

First of all, as an oil-producing country, rising oil prices have strengthened Russia's national strength, which is the basis on which it chooses to send troops when oil prices are high.For example, in the year before the wars of 1979 and 2008, GDP growth in Russia (the former Soviet Union) was 13.8 per cent and 8.5 per cent respectively, the highest in each round of economic recovery.

Second, as a major consumer of crude oil, high oil prices have exacerbated inflation in western countries, which is easy to cause domestic public dissatisfaction with the government, thus reducing the external resistance of Russia to send troops.In the United States, for example, before the wars of 1979 and 2008, domestic inflation (CPI) was 12.6% and 5.6% respectively. High inflation hit consumer confidence in the United States, and the approval rating of the then US president was at a low point during his term of office because of public dissatisfaction with governance.

But things go to extremes. Oil prices and high inflation have eroded consumer demand in the West, while discontent among domestic voters will force democratic governments to put pressure on OPEC.This is why after each of the above-mentioned Russian foreign wars, whether it is the collapse of demand or the release of supply, the crude oil market will undergo a severe clearing, although it will often superimpose the impact of external events.

There are many similarities between the situation in Ukraine and history since 2022.：The sharp rise in oil prices has exacerbated high inflation in the United States and Europe, while Biden's approval ratings have continued to hit record lows since taking office, along with lower consumer confidence. Therefore, under the unbearable burden of high inflation, there is a growing need for an external catalyst to curb the rise in oil prices, and we expect that once Russia goes to war with Ukraine, it will once again witness the climax of this round of oil price rise.Throughout the year, oil prices above $100 will not last long.

Risk Tips:The spread of the epidemic exceeded expectations, and the policy hedged against the economic downturn was not as effective as expected.