The worst could still come for oil and gas prices

As oil prices have risen to unprecedented levels since 2008 – $ 139 a barrel – experts warn that the worst could yet come.

Ehsan Khoman of MUFG Bank writes, “The global oil market is facing its biggest crisis in decades. “We haven’t got the maximum pain yet.”

Moscow’s aggression on Ukraine has reshaped global energy markets, sparked speculation about the unimaginable potential of Russian oil and gas exports before it could be halted, and sparked speculation about how high prices could be.

According to the International Energy Agency, Russia is the world’s third-largest oil producer and largest exporter of oil to world markets, including oil products, with about 60 percent of its exports going to Europe.

At the end of last year, global oil demand was about 100 million barrels per day. Russia exports about 5 million barrels of crude and condensate and 2.8 million barrels of oil products per day.

Russia is also the world’s second-largest natural gas producer and accounted for about 40 percent of the EU’s gas supply in 2021.

Russia’s significant role in global supply means that sanctions on oil and gas exports have been lifted by Western countries – especially before the invasion, markets are already tight and prices are high.

“We have no strategic interest in reducing the global supply of energy,” White House Press Secretary Jane Sackie said last week. “It simply came to our notice then [and] All over the world. “

Yet Russia’s outstanding role in the global energy market means that oil and gas are also an external source of income during President Putin’s administration, accounting for more than a third of last year’s government revenues.

As Russia’s bombardment of Ukraine intensifies, the prospect of a power embargo has grown unbearably high on the agenda, with Ukraine calling for a complete embargo on Russia’s oil and gas.

Already, a growing number of companies have stopped buying Russian oil for fear of existing financial sanctions, future energy sanctions – or simply a reputable response.

When Shell bought a cargo of Russian crude oil on Friday, Ukraine’s foreign minister tweeted: “Doesn’t smell Russian oil?” [like] Ukrainian blood for you? “

MHOFG’s Khoman says about 70 percent of Russian oil is now “struggling to find buyers” and that “in reality, the sale of unnamed Russian oil is subject to sanctions.”

The possibility of a formal embargo this weekend has slipped away as US Secretary of State Anthony Blinken says Washington was “very active in negotiating with our European partners to ban Russian oil imports to our country … while maintaining, of course, a stable global supply of oil “

The key question is whether these two things can be mutually exclusive, given yesterday’s rise in oil prices amid fears that Russia does not have enough surplus power to replace it.

“If most of Russia’s oil exports were cut off, there could be a deficit of five million barrels per day or more,” Bank of America analysts warned last week. That means oil prices could double from 100 100 to 200 200 a barrel. “

Helima Croft, head of global commodity strategy at RBC Capital Markets, said: “This may prove to be a warning that the market is already shaking up for additional barrels to meet the daily Russian export deficit of 3-4 million barrels per day.” Must be ordered “

The United States is reportedly considering sending a delegation to Saudi Arabia to “apply for more production assistance,” which Croft argued Riyadh would consider “avoiding a catastrophic global economic crisis.”

However, he estimates that the UAE, Kuwait and Iraq together with Saudi partner OPEC cartel producers could “bring in between 2-2.5 million barrels per day in the next 30-60 days”.

So replacing Russian oil could require a nuclear deal with Iran, which could mean lifting sanctions and adding millions more barrels to the market and potentially easing US sanctions on Venezuela.

If all of this works, higher exports from Saudi Arabia, Iran and Venezuela could combine to create “significant dents” to replace Russian barrels, but the ramp will take months to raise and there will be no additional capacity and no “no” error, Croft said. Place for “.

The difficulty of replacing Russian supplies in Europe could mean that the United States alone, which imports 400,000 barrels per day from Russia, initially bans imports, Goldman Sachs analysts say.

However, even the threat of U.S. sanctions “will continue to drastically reduce Russian maritime oil exports due to the threat of additional sanctions or public condemnation,” they noted.

Without a breakthrough in the peace talks, Khoman argues that “the only practical way to rebalance today’s exceptionally tense oil market is to break the demand”. He believes that “Brent crude could cost about $ 180 a barrel” for consumers to use their oil to start rationing.

So far there has been little talk of a formal ban on gas but gas prices have risen, reaching a new record high in Europe yesterday. Prices in the UK have risen 20 times over a year ago.

Tom Marjek-Manser, a gas expert at price agency ICIS, said the oil embargo talks increased the risk of Putin taking “retaliatory” measures to reduce gas exports and ultimately increase the likelihood of Russian gas approval in the West.

Both situations would represent a huge push for the gas market. Analysts have warned that there is not enough liquefied natural gas in the world to replace the Russian pipeline gas and that if the supply is cut off, it could potentially cause gas rationing and even blackouts for European industries.

It remains to be seen whether formal sanctions will be imposed, with Germany insisting that Russia’s energy supply was “necessary” for Europe.

Yet fears of such a move are pushing gas prices to such heights that it has begun to hurt Europe’s economy, even as Russian gas flows.

“At this price, we’re probably moving closer to purchasing power in Western Europe,” said Ramesh, a strategist at consultant Rystad Energy.

Meanwhile, rising prices are boosting Russia’s income.

“What we see in the energy market is a huge gift for Putin,” tweeted Simon Tagliapitra, a senior fellow at the European think tank Brugel.

“The US-EU must now decide whether to go for a full energy embargo (an oil embargo would in any way lead to Russia’s gas cuts) or to abandon the whole idea. Negotiating without distribution means a huge extra revenue for Putin. “

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