A Russian state flag flies on the top of a diesel plant in the Irkutsk Oil Company-owned Yarakta Oil Field in Irkutsk Region
By Noah Browning, Simon Jessop and Balazs Koranyi
Mon., March 7, 2022
LONDON (Reuters) - The possibility that the United States might ban Russian oil imports has triggered a surge in Brent crude to almost $140 a barrel, its highest level since 2008.
Russia is the world's top exporter of crude and oil products combined, at around 7 million barrels per day (bpd ) or 7% of global supply. Such a ban would be unprecedented, turbocharging already sky-high prices and risking inflationary shock.
Here are some of the likely consequences of a ban:
RECORD PRICES
Western governments have not directly sanctioned Russia's energy sector but some customers are already shunning its oil to avoid becoming entangled in legal troubles later.
JP Morgan predicts oil could hit a record $185 a barrel by the end of 2022 if disruption to Russian exports lasts that long, although along with most analysts polled by Reuters the bank expects a yearly average price below $100.
The last time oil prices were above $100 was in 2014 and levels reached on Monday were not far shy of a peak of more than $147 hit in July 2008. That is a steep climb from two years ago, when a coronavirus-driven demand slump saw a barrel of West Texas crude at below $0 as sellers had to pay to get rid of it.
"A prolonged war which causes widespread disruption to commodity supplies could see Brent moving above the $150 a barrel mark," Giovanni Staunovo, commodity analyst at UBS, said.
INFLATIONARY SHOCK
With natural gas prices hitting all-time highs, soaring energy costs are expected to push inflation above 7% on both sides of the Atlantic in the coming months and eat deep into households’ purchasing power.
As a rule of thumb, every 10% rise in the oil price in euro terms increases euro zone inflation by 0.1 to 0.2 percentage point. Since Jan 1, Brent crude is up around 80% in euros. In the U.S., every $10 per barrel rise in oil prices increases inflation by 0.2 percentage point.
In addition to being a major supplier of oil and gas, Russia is also the world's largest grains and fertilisers exporter and a top producer of palladium, nickel, coal and steel. The bid to exclude its economy from the trading system will hit a wide range of industries and add to global food security fears.
HIT TO GROWTH
A ban on Russian oil would further slow the nascent global recovery from the coronavirus pandemic.
Preliminary calculations by the European Central Bank (ECB) suggest that war could cut euro zone growth by 0.3 to 0.4 percentage points this year in a baseline scenario and 1 percentage point in case of a severe shock.
In the coming months, there is a high risk of stagflation, or little to minimal growth coupled with high inflation. However, further, euro zone growth is likely to remain robust, even if commodity prices prove a drag.
In the U.S., the Fed estimates that every $10 per barrel rise in oil prices cuts growth by 0.1 percentage point, though private forecasters see a more muted impact.
In Russia, the damage is likely to be large and immediate. JPMorgan estimates that its economy will contract by 12.5% from peak to trough.
CENTRAL BANK IMPACT
For the U.S. Federal Reserve, the inflationary impact has already proved too great and its Chair Jerome Powell has said that interest rates need to rise this month, piling pressure on borrowers.
For the ECB, the urgency of policy action is less acute as the labour market still enjoys spare capacity and there is little home-grown inflation.
"No one can seriously expect the ECB to start normalising monetary policy at such a moment of high uncertainty," ING economist Carsten Brzeski said.
SUBSTITUTES?
With fossil fuel demand rebounding from the pandemic but supply around the world still tight, policymakers will be under pressure to ramp up supply despite pledges to back green energy.
"There will be a dial back on green initiatives in the short term in an attempt to reverse the contraction we've seen in fossil fuel supplies," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said.
Talks to unleash Iran from international sanctions are in advanced stages and high oil prices are set to galvanize investment in U.S. shale, but supply may not be set to come online soon enough to replace Russian output.
"The potential supply impacts are so large that there isn’t a quick way to substitute in the medium term, meaning the only mitigant will be price inflation of these inputs and the products that depend on them," said Alex Collins, senior corporate analyst at BlueBay Asset Management.
THE LONG VIEW
The Russian-Western impasse could invigorate Moscow's relationship with Beijing but the energy infrastructure between the two countries is scant.
"Although Russia's Pivot to the East has accelerated gas cooperation with China via gas infrastructure ... all these developments are still in their infancy compared to the mature markets in Europe," said Kaho Yu, principal Asia analyst at risk consultancy Verisk Maplecroft.
Renewables could get a boost in the medium- to long-run as countries seek to wean themselves off Russian energy.
"We should take the subsidies we now devote to natural gas, coal, and petroleum and put them into renewable energy generation, electric mobility and EV charging infrastructure, heat pumps, building efficiency upgrades," said Wolfgang Ketter, professor at the Rotterdam School of Management at Erasmus University in the Netherlands.
"Anything that will lead to long term energy security by reducing fossil fuel dependency."
(Additional reporting by Bozorgmehr Sharafedin; Editing by Alexander Smith)
Oil prices spike and what a Russian crude ban could mean for the markets
Published by Sara Simper, Editorial Assistant
World Pipelines,
Oil prices surged yesterday morning to highs not experienced since 2008 as bans on Russian crude seem more likely, and delays in a US-Iran deal raise questions about supply relief. The US is staring down the barrel of a supply crisis, with gasoline prices already soaring nationwide, and the Biden administration appears open to exploring alternative sources such as Venezuela, where sanctions have kept crude imports off the market for years.
To date, the West’s financial sanctions against Russia have not proved effective in de-escalating the conflict in Ukraine. Expanding sanctions to include physical commodities, including Russian oil exports, is definitely on the table. The impact of a US unilateral ban would be minimal, only impacting about 100 000 bpd of crude exports from Russia. If the US can encourage Europe to participate in the embargo, the continent would be blocking about 3.8 million bpd monthly average of Russian crude imports.
The EU agreeing to an outright ban on Russian oil is unlikely given its member’s dependence on the fuel. The daily operations at many European refineries rely on a Russian crude diet, mainly imports of Urals. Italy, the Netherlands, France, Romania, and Poland are some of the largest importers of Russian crudes, and many of these countries have continued to receive deliveries that were fixed before the invasion of Ukraine, fulfilling already completed transactions, as the time lag between orders and loadings is usually in 10 or 25-day intervals.
An outright export ban on Russian crude from Western countries could wipe out as much as 4 million bpd, and participation from China and India would take even more barrels off the market.
In addition to Russian barrels at risk of upstream disruption, regional producers Kazakhstan and Azerbaijan, which send a large portion of their exports to the global market via Russian pipelines and ports, are also in jeopardy. Kazakhstan sends significant volumes of its light-sweet CPC blend that it produces at the Tengiz, Karachaganak and Kashagan via Russia, but a small portion goes directly to China and would not be affected. Azerbaijan sends its BTC blend produced offshore in the landlocked Caspian via the Baku-Novorossiysk pipeline, and there are few alternatives for rerouting. In total, the FSU countries export about 6 million bpd from Russian ports and pipelines.
We should be preparing for a Russian gas shut-off
Published by Sara Simper, Editorial Assistant
World Pipelines,
In the previous weeks, long-held policy positions fell like dominoes in Berlin. Having already blocked his country’s Nord Stream 2 pipeline from Russia, Olaf Scholz committed to two new LNG shipping terminals and a review of Germany’s anti-nuclear power policy. He is decoupling his economy from Russian gas.
Germany is not just the EU’s power broker and largest economy. It’s also the bloc’s biggest user of Russian gas. For that reason, it has often made it harder to wrest the continent free of its Russian addiction. The EU has made the right noises in the past – the last occasion was Russia’s annexation of Crimea in 2014 – but Nord Stream 2 forged ahead regardless and Russian gas imports went up.
On 27 February, that situation appeared to have changed decisively and the EU may now be freer to pursue its dream of energy independence from Russia. This may be possible short-term and long-term, but over the next two or three winters, it looks exceptionally hard. Europe should still try, and should be supported by allies in the UK, US and far beyond. This is both a short and long-term priority that perfectly aligns security with broader policies.
As well as the Scholz speech, Germany and others softened their opposition to cutting Russia’s access to the SWIFT financial communications system. But they exempted energy, in order to maintain oil and gas flows and European ‘energy security’. It is a strange definition of security that entails sending US$350 billion/yr to the enemy at the gates.
This stubborn thread of energy interdependence is a geostrategic problem. If it can be solved by the West, then Putin will likely be made to think again. Since 2014, he has eradicated fiscal deficits and built a war chest of more than US$600 billion in currency reserves. The most recent sanctions on the Central Bank of the Russian Federation, combined with the plummeting rouble, will knock large chunks off that fund. The central bank’s capacity to perform market interventions will be limited, Russians will suffer high inflation and Putin will struggle to finance an expensive war. His oil and gas revenues are becoming increasingly important to him, so they should be slashed wherever possible.
China may help by laundering Putin’s roubles, but whether it wants to is currently a great unknown. Any help would likely come with very significant geopolitical strings attached. But it might also give Putin enough wriggle room to squeeze European gas supplies even further. When a SWIFT ban was touted in 2014, Russia’s then-Prime Minister Dmitry Medvedev said it would be an ‘act of war’.
Europe therefore has to plan for the end of Russia gas supply in the short term, whether it likes it or not. It can either do it voluntarily or risk Russia doing so as a counter-sanction, perhaps with Chinese support.
In either case, could Europe cope? A lot depends on timeframes and united political will. If Europe and its allies believe this is a true emergency, then the ‘art of the possible’ comes into play. If vaccines can be created in months having previously taken many years, one can imagine that energy systems can also be re-engineered remarkably quickly. Arguably, now is the time to show Russia – and Xi Jinping regarding Taiwan – that the liberal democratic world will move mountains when red lines are crossed.
In the short and long terms, Europe can limit its exposure to Russian gas. It’s the bit in the middle, the next two or three winters, where difficulties lie.
For the short term (i.e. this year), the immediate question has been whether the 2021-22 winter would be harsh. Unlike invaders of the past, Putin hopes for cold, wet weather so that Europeans stay in and turn up the heat. That hasn’t gone his way so far and high energy prices have added an incentive to turn thermostats down. European gas storage is currently around 29% of capacity, which is the lowest it’s been in March in a decade, but it looks like we’ll squeak through to April, when storage usually starts refilling again.
The longer term (2025 and on) will be very achievable too, especially if Germany sticks to its new course. If Germany chooses to reverse its policy against nuclear, as it should, then Europe will find it far easier to build energy security. According to Aurora Energy Research, the next few years of ambitious growth in European renewables will just be filling the hole left by nuclear and coal stations being shut down. Spain, Sweden and the Netherlands all showed massive jumps in renewable capacity since 2019, and others can do similar over the longer term. But only if Europe sticks with nuclear can these go towards replacing Russian gas.
So far, it’s all very achievable. However, the medium term of 2022 - 2024 is much, much harder. The 2022 - 2023 winter will follow two years of low gas reserves, so it will start from a low base. Domestic production is almost maxed out. A little might come from smaller European producers, and the Dutch might relax regulatory limits at their Groningen field. But British and other sources are unlikely to rise as it takes many years to commission new fields.
Fracking is a possibility, although in Britain this would spend huge political capital for not much gas. European countries might be more successful in persuading their communities. There is certainly a hypocrisy in importing shale from America while condemning it at home. Yet ramping up production before 2025 seems unlikely. Again, it comes down to the political art of the possible.
There will also be local challenges. Not all natural gas is the same – it is regulated and treated in different ways in different countries. And the European gas system is built for east-to-west transit, so reversing flows to run from Western Europe, where most LNG terminals are found, presents some challenges. But it seems manageable in a two-year timeframe under political pressure. This is made much easier by the EU’s security of gas supply regulations in 2010, which forces cross-border pipelines to be able to operate in both directions. So ‘reverse flows’ (west to east) can carry more gas, but there are still problems.
Generally, any step that moves the long-term aim of decarbonisation a bit nearer without undermining energy stability will help to resolve this immediate crisis and ensure that future Putins (or Xis) have less leverage. Natural gas is fiendishly useful, but alternatives are available. It provides stability on electricity grids, but we can and should redesign markets to incentivise flexibility providers such as sustainably sourced biomass, hydropower, batteries and hydrogen, as back-ups to massive deployment of wind and solar. Gas also provides most of our heating, but we can switch to electricity or hydrogen.
Making these moves sooner rather than later is a move towards energy security, and the process is already underway – Putin is giving us a reason to speed up.
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