Monday, December 4, 2023

After Russian hammer in Ukraine, sanctions talk brings sickle to oil prices

No disruption in energy supplies seen after EU sets aside SWIFT ban
A general view of Yuganskneftegaz pumping station in Priobskoe oilfield some 200 kilometers from Nefteyugansk, Russia.

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Oil prices slipped on February 25 after sharp rises early in the session as traders were concerned that sanctions against Moscow following Russia’s invasion of Ukraine would disrupt global oil supply.

The April Brent crude futures contract was down $2.29, or 2.3%, to $96.79 a barrel by 1:15 p.m. EST (1815 GMT), after climbing as high as $101.99, Reuters reported. The more active May contract shed $1.72, or 1.8%, to $93.70. US West Texas Intermediate (WTI) crude fell $1.81, or 2%, to $91.00 a barrel, after hitting a session high of $95.64. For the week, Brent was set to rise about 3.5%, while WTI was on track to fall around 2.2%.

On February 24, Russia’s invasion of Ukraine boosted prices above $100 a barrel for the first time in around 8 years.

“I think we have seen the peak of the oil price unless something even worse happens on the Ukrainian front that could lead to tougher sanctions than we have already seen,” Chris Weafer, co-founder of Macro Advisory in Moscow, told NE Global by phone on February 25. “But based on what we now expect which essentially is Russia taking over Ukraine, forcing regime change and putting kind of a more Moscow-friendly government in place in Kiev. I mean that’s pretty much what’s expected and that’s what is reflected in the latest round of sanctions that we had from Europe and the US and on that basis then Russia has made a very firm commitment that it will not use energy as a political weapon, it will not disrupt energy exports, either oil or gas or products and because Europe has rejected banning Russia from the SWIFT system then there is no reason to expect any disruptions,” Weafer argued.

Germany has refused to ban Russia from the SWIFT international payments system, arguing it would put gas deliveries at risk.

“Therefore, the concern that there would be a disruption was one of the reasons that the oil price has risen over $100 for the last week. I think that concern is now easing and will ease further so the price should drift towards 90,” Weafer said. “But I really wouldn’t expect the price to drift down below 90 dollars because of the basic underlying supply and demand fundamentals are quite supportive for the oil price.

He explained that OPEC is struggling to meet its commitments to add additional volumes that it’s promising each month. “That is coming out much more slowly and some countries can’t even meet, such as Iraq, they already said they won’t be able to do it. I think a deal with Iran now seems even further away because it is difficult to see how the White House can push for sanctions reductions against Iran when they are tightening sanctions against Russia. That might be difficult to get past Congress and the oil recovery continues so it is very likely that we will see the pre-pandemic daily demand of 100 million barrels per day on fourth quarter of this year based on what is happening with Covid and the recovery,” Weafer said.

Saudi Arabia has extra capacity, but it will only add slowly because the Saudis have a higher oil price requirement to balance their budget with the funds in their investment programs than Russia. “I would expect that Saudi will add the additional oil, but I would imagine that they will do it within the OPEC+ agreement. I don’t expect Saudi to add additional oil beyond the OPEC+ agreement at this stage. And I wouldn’t expect they would let the oil price spike much above 100 at which point they might be concerns about the global economy and contributing to inflation,” he said.

Riyadh will not yet add additional oil to keep the price low because the current price has spiked up to $100 per barrel on the back of Russian supply fears, those supply fears are now easing and therefore the price will probably drift back down to the level which Saudis are quite comfortable with which is around the 90-dollar level, Weafer said.

Gas prices also rose this week on the reaction to the news that certification of the Nord Stream 2 natural gas pipeline has been suspended. “Of course, it was only suspended, it has not been cancelled. Again, if and when the geopolitical situation was to stabilize you could expect the Nord Stream 2 certification to resume because the bottom line is Europe is going to need more gas,” Weafer said.

Weafer said Russia’s invasion of Ukraine contributed to the high gas prices. “These continuing uncertainties as to what might happen because let’s face it, there is a major war taking place in a country which is currently a major transit route of gas and there is always the chance that by action or by design some of the facilities could be damaged and the supply. So that is keeping pricing up but hopefully the fighting will end soon and hopefully the price will reflect that,” Weafer said.

The latest events have highlighted Europe’s energy dependency on Russia. “When you say that Europe hates the fact that they are reliant on Russian energy that relates to officials in Brussels and applies to some governments in Eastern Europe. It does not apply that Russia’s biggest customers principally Germany, Italy, and Austria,” Weafer argued.

But Justin Urquhart Stewart, co-founder of Regionally in London, Russian President Vladimir Putin is exploiting weaknesses in the West. “He is testing it. Quite rightly he is looking at a weak Europe post (former German Chancellor Angela) Merkel, Britain post Brexit and (US President Joe) Biden not exactly carrying himself in glory,” he told NE Global by phone on February 23. “The thing to remember the key element with it is Russia can’t afford this war,” he said. “Their economy is in bad shape and although the price of oil is going up and they will be able to sell it, but the economy is slow and is not growing,” Urquhart Stewart said.

He noted that nobody knows where Putin will stop. “The trouble is we can’t read him now. I think he is changed; he is behaving more like a new generation of tsar rather than a modern political leader. All his language and the way he is behaving is becoming far more isolated and dictatorial,” he said.

Urquhart Stewart noted that Russia is also dependent on the European energy market and should threaten to walk away. “They need to say: ‘Look we know that we are very dependent on it, but you aren’t the only supplier we will walk away if necessary. I think that’s the only way they can try and play it,” he said, adding, “The Americans have to really make sure that they divert huge amounts of gas supply and whether they can do that in the short haul remains to be seen. If that is the case, Europe can survive. Politically it has to otherwise it will look like a busted flush in front of everyone”.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media


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