According to the Hungarian government’s point of view, there is a spectacular, yet key factor behind the development of domestic utility costs, and that is cheap Russian oil. This is the background element on which, according to them, one of the cornerstones of overhead reduction is built. If this source ceases, it will not only be an economic issue, but will directly affect the everyday life of Hungarian households. According to the government’s point of view, if Hungary is cut off from cheap Russian oil, the current utility reduction system will become unsustainable.
This raises the question of whether Russian oil is really as cheap as we often hear. And if so, compared to what exactly is it considered cheap, and how big is the difference we’re talking about? Much more complex processes lurk in the background. The question is not only whether Russian oil is cheaper, but also how predictable its price is and how well it can withstand waves of international price changes. And this is a particularly important point, since the movements of the global oil market – which are clearly evident in the case of Brent oil – can cause significant swings, while other sources can have different dynamics.
What happened to the discount on Russian oil?
If we look a little closer at the numbers, we get a more nuanced picture of what “cheap” Russian oil really means. The price difference between Brent and Ural-type crude oil – the so-called spread – is far from constant, it changes constantly. The recent past is particularly telling in this regard. As Gábor Regős, the lead economist of Gránit Alapkezelő told Index, between 2022 and 2023 this difference was quite significant at times, approaching 30 dollars per barrel.
This meant that Russian oil could be purchased significantly cheaper compared to the world market reference price. However, by 2024, the situation had changed.
The spread gradually decreased below $10 and stabilized at this level. And what is perhaps even more interesting is that this trend is still ongoing. The numbers show that Russian crude is trading at around $92.4 per barrel, while Brent is at $103.1 (Wednesday afternoon at the time of writing). So the difference is still roughly $10. And this highlights an important detail: Russian oil does not move in a “separate world”, but essentially rose in price together with Brent oil. The difference remained, but its extent was significantly reduced.
Awhen the difference between the two oil types increased spectacularly earlier, there was a very tangible reason for it. Because of the sanctions, it was much more difficult for Russia to sell its own oil, so it was forced to find a market for it at a significant discount. This was the period when the spread really jumped and Russian oil really got significantly cheaper. However, this state did not last. Russia adapted to the changed circumstances. It has built new sales channels, for example with the help of the shadow fleet. It found stable take-up markets, mainly in India and China, and as these channels strengthened, the price difference gradually narrowed and then returned to a much lower level.
Geopolitical decisions were once again behind the latest swing leading to the current situation. For a while, the United States practically cut off India from Russian oil, which temporarily increased the spread again. However, this effect did not prove to be permanent. In order to alleviate tensions on the oil market, the purchase of Russian oil was later allowed again, which suddenly brought additional demand to the market. As a result, the price of Russian oil began to rise again, and in parallel, the previous large price difference narrowed again.
Hif we look at all this together, it is clear: the price of “cheap Russian oil” is not a permanent fact, but a constantly changing phenomenon shaped by geopolitical and market processes. Gábor Regős summed it up like this:
With the fact that a significant part of Middle Eastern oil has fallen off the market, i.e. the supply has decreased, the value of what is available has increased – as can be seen in the case of Russian oil. Thus, due to the lower supply, Russian oil also becomes more expensive, and its price is not independent of the market processes affecting Brent.
Let’s imagine this as if oil were a large common “stock” in the world. If there is suddenly less of that supply—for example, because some of the Middle East’s oil is off the market—then any remaining oil will suddenly become more valuable. In this case, not only one kind becomes more expensive, but almost everything. This is also true for Russian oil, even if it used to be cheaper. Simply because there is less oil available, but just as many – or even more – people want to buy it. That is why the price of Russian oil does not move in a separate world either. If the price of Brent oil rises due to market trends, then the price of Russian oil will follow, at best it will remain at a slightly lower level.
Permanent increase in price or temporary shock? The key is in the offer
But how long will the increase in price last? How long this price increase stays with us is ultimately always decided by the same thing: how much oil is on the market and how many people want to buy it. And this is where a key player comes in, which is often talked about recently: the Strait of Hormuz. This narrow sea route is a kind of “oil highway” for the world – roughly a third of the global oil trade passes through here. If this strait works unhindered, the market can remain balanced. But if it closes permanently, it means that a significant part of the supply will suddenly disappear.
And that’s when everyone on the market is well aware that what’s available will be bought at almost any price. In such a situation, not only the price of Brent oil may continue to rise, but also that of Russian oil
– since, as we saw earlier, the prices of the two move closely together. Moreover, according to Gábor Regős, the situation could easily escalate to the point where real competition for oil would develop. In recent weeks, we have already seen something similar with LNG shipments, tankers simply take the cargo to where they pay more for it. The same logic may apply in the oil market.
In this environment, the quest to push Russian oil out of the market becomes quite unrealistic. If the European Union does not buy it – its volume has already decreased in recent years – then others will. The demand does not disappear, it just rearranges itself.
Of course, there are two sides to this coin. If the situation in the Middle East settles down and supply is restored, the current tension may subside quickly. In such cases, the price of Brent may also fall, and the question of how to push Russian oil out of the market may come to the fore again. In this case, a larger price difference may arise again, i.e. with a lower Brent price, Russian oil may once again appear at a significant discount.
Currently, the Hungarian economy practically does not have access to Russian oil. No deliveries are coming from either Ukraine or Croatia, so the price of the more expensive Brent type oil must be calculated from the outset. If the Friendship pipeline were to work again and Russian oil became available again – as we saw before – it would indeed be cheaper than Brent, but it would still be much more expensive than before due to the tensions in the Middle East. And this is where another effect, at least as important, enters the picture: the movement of the forint in the recent period closely followed the development of the price of oil.
Following the events in the Middle East in recent weeks, the forint weakened by roughly 4 percent compared to the euro. The rising price of oil means more expensive imports, which worsens the balance of the current account, and this classically weakens the domestic currency, in addition to the region’s risk premiums. Moreover, it is not only about oil. The increase in the price of gas acts in the same direction, so the two factors together strengthen the pressure on the HUF. There is an additional risk to this, due to the Ukrainians, and this is the issue of security of supply. The loss of the Friendship line in itself means uncertainty, which is also a weakening factor. And if the import of Russian gas were also restricted, it would have a similar effect.
Oil, HUF, inflation: the effects come together
If the situation in the Middle East does not settle – or even escalates further – then the forint’s weakening may be greater than what we have seen so far. From the point of view of inflation, what “breaks through” into everyday life almost immediately is the price of oil. Everyone feels the impact of this directly, as it appears in gas station prices practically overnight. The government tried to moderate this rapid and spectacular rise in prices by introducing a protected price. However, it is important to see that this did not eliminate the inflationary effect, rather it only slowed down and moderated its strength. So the price increase did not disappear – it was just less sudden and painful.
The decision was based on a basic assumption: that the current crisis will not last forever. The government started from the assumption that after a while the market balance will be restored, prices will be restored, even below the protected level, and the current supply disruptions will cease. However, whether this will actually be the case remains an open question. Especially in light of the fact that the future of even key factors such as the operation of the Friendship pipeline is not clear, the pipeline has been attacked twenty-two times in the last four years. This means that the outcome of the situation is not as predictable as it might seem at first.
This is followed by the impact of the forint exchange rate: a 1 percent devaluation increases inflation by approximately 0.3–0.35 percentage points, i.e. the effect of the current approximately 4 percent weakening is slightly more than 1 percentage point. Of course, this is not so simple, since the strengthening of the forint has not been fully reflected in prices, so it is not necessary that the weakening of the forint will be reflected.
Gábor Regős added that the third step is the appearance of gas prices – due to the fixed-price contracts, the appearance is the slowest here, but if the gas price remains permanently high, then this will also affect inflation. In addition, there may be other inflation-increasing factors, such as the price of fertilizer. “The good thing is that now we are starting from a particularly low inflation level of 1.4 percent, compared to 2022, which means that the situation is more favorable, and energy prices are not that high. It is certain, however, that the rise in energy prices is not favorable for Europe and thus for Hungary either, since we need to import both gas and oil.”
The key question arises: is what we are seeing now on the oil market just a temporary fluctuation or the beginning of a new, permanently higher price level – especially from the point of view of the Hungarian market? According to Gábor Regős, the answer at first sight points more in the direction of cyclical movement. The current prices reflect that the market is now pricing a specific problem: supply disruptions. In other words, that the path of oil is currently blocked – for example, due to the uncertainties around the Strait of Hormuz.
At the same time, there is an important assumption behind market expectations: that this state of affairs will not last forever. According to the scenario, sooner or later – even in a few weeks, in the worst case, within a few months – the situation will be resolved, and the transport routes will start working again. If this is indeed the case, oil prices may also reverse and begin to decline.
But here comes the more uncertain part of the story. What if the situation doesn’t get resolved that quickly? If the supply disruption remains permanent or even worsens? In this case, we are no longer talking about a simple swing, but about the fact that prices can get stuck at a new, higher level – and even rise further. In other words, the current situation is a kind of turning point: everything depends on whether the supply problems turn out to be temporary or remain with us permanently.
If we look at the big picture as a whole, it is clear that the price of oil – and through it the situation of the Hungarian economy – does not depend on a single factor, but is the result of several interrelated processes. Such are the evolution of the geopolitical situation, the security of transport routes, global supply and demand, and how the market reacts to them. “Cheap Russian oil” is therefore not a permanent difference, but a constantly changing circumstance, the extent of which can change significantly from time to time.
(Cover image: A worker passes through the Oil Industry of Serbia on the territory of Pancova oil refinery on June 11, 2018 in Serbia. (Photo: Oliver Bunic/Bloomberg/Getty Images)
