New Delhi: Oil prices fell below $60 per barrel on Wednesday, touching their lowest level since February 2021, as markets reacted to renewed optimism around a possible resolution to the Russia-Ukraine conflict. European gas prices also moved lower, slipping below EUR27 per megawatt hour, around 16 per cent lower than levels seen in mid-November.
The price fall followed reports from ongoing negotiations in Germany that the United States had offered NATO-style security guarantees to Ukraine, similar to Article 5 commitments. These developments, along with comments by US President Donald Trump that the conflict could be closer to resolution than at any previous point, prompted investors to reassess geopolitical supply risks.
How peace signals are affecting oil markets?
Oil markets have long priced in a risk premium linked to the Russia-Ukraine war, given Russia’s role as a major global oil supplier and the impact of sanctions and infrastructure attacks on supply flows. The latest diplomatic signals have led traders to factor in the possibility that these risks may ease.
According to Rystad Energy, the prospect of a ceasefire would have direct implications for Russian oil flows. “In the event of a ceasefire, US sanctions on Russian oil companies would likely be lifted relatively quickly, while European sanctions would probably be removed more gradually,” said Jorge Leon, head of geopolitical analysis at Rystad Energy.
He added that an end to attacks on Russian oil infrastructure would further reduce near-term supply risks, allowing oil volumes currently stored at sea to return to the market.
What happens to Russian oil supply if sanctions ease?
Rystad Energy estimates that nearly 170 million barrels of Russian oil are currently stored on water. If sanctions are eased and trade flows normalise, a large portion of this oil could re-enter global markets, increasing supply availability.
Leon noted that the removal of sanctions would also affect pricing dynamics. Discounts on Russian crude, which widened due to sanctions and trade restrictions, could narrow as buyers return and shipping constraints ease.
Such a scenario would significantly reduce concerns about sudden supply disruptions, which have supported prices over the past three years.
Implications for OPEC+ strategy
A potential easing of sanctions on Russia would also alter internal dynamics within the OPEC+ alliance. “The lifting of sanctions would also change incentives within the OPEC+ alliance, making it more likely that the group resumes a market-share strategy after the planned pause in the first quarter of 2026,” Leon said.
With Russia able to increase production more freely, the incentive to hold back supply to support prices could weaken, adding further downward pressure on oil markets.
Why markets remain cautious despite optimism?
Despite the current price reaction, Rystad Energy cautions against assuming a swift resolution. Leon said markets have repeatedly moved on peace expectations over the past year, only for negotiations to stall.
“As a result, while the current optimism is clearly weighing on prices, its durability will depend on tangible progress toward a credible and lasting agreement,” he said, adding that oil markets are likely to remain highly sensitive to political developments until such progress materialises.
For now, prices reflect reduced geopolitical risk, but the outlook remains tied closely to diplomatic outcomes.
