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Russian troops in Ukraine spell uncertainty for oil and natural gas markets

Russian Interior Ministry troops. (AP Photo/Yuri Tutov)

Russian Interior Ministry troops. (AP Photo/Yuri Tutov)

Published Feb 23, 2022


Russia's mounting aggression against Ukraine is creating a new and potentially prolonged period of uncertainty about global oil and gas supplies.

A protracted conflict could send crude oil prices higher over the long term, taking the price of gasoline with them. It could also create more uncertain natural gas supplies for Europe, which relies on Russian exports to heat and power many of its homes and factories.

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Russia's ability to continue serving as one of the world's largest oil and gas suppliers will depend on several factors: whether Western sanctions disrupt Russian exports; whether conflict damages Russian export pipelines traveling through Ukraine; and whether Russia resorts to curbing its exports to punish the West.

For now, analysts said they don't see a high likelihood of serious supply disruptions, noting that Russia can't just shut down its oil and gas wells without major expense. But fears of widening conflict still pushed prices higher Tuesday, with West Texas crude oil edging up 1% to $92.30 a barrel and European natural-gas prices rising more than 10% to 80 euros ($90.65) per megawatt-hour.

"I still don't think that we understand what the full implications are for energy markets writ large, and that's because there is this really glaring uncertainty as to whether yesterday's actions in regard to [Ukraine] represent the end state of what Mr. Putin intends to do or simply a starter course," said Jonathan Elkind, senior research scholar at Columbia University's Center for Global Energy Policy and a former energy official in the Clinton and Obama administrations.

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President Joe Biden on Tuesday said he will strive to contain price spikes related to the conflict, which could exacerbate already sharp inflation rates that are vexing consumers and the White House.

"I want to limit the pain the American people are feeling at the gas pump," Biden said from the White House. "This is critical to me."

The most immediate energy-market fallout came in Europe, as Germany announced Tuesday it is suspending authorization of Nord Stream 2, a still inactive natural-gas pipeline from Russia that was designed to significantly boost Russian exports.

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Because that pipeline isn't already delivering gas, the suspension of its commissioning won't lower supplies to Europe immediately. Germany's move will likely anger Moscow, though what, if anything, Russia will do about that is uncertain.

In a tweet Tuesday, Dmitry Medvedev, deputy chairman of Russia's security council, warned that Germany's decision means it will "very soon" be paying more than double for natural gas. He did not elaborate.

Russia is the world's second biggest natural gas producer, behind the United States, and the third largest oil producer, behind the United States and Saudi Arabia, according to Energy Department data.

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Bob McNally, a longtime energy consultant and former adviser in the George W. Bush White House, said crude oil prices could spike above $100 a barrel in the short term on fears of a protracted conflict, but would likely reverse unless there is a severe supply disruption.

"I do expect now we're probably headed over $100 a barrel just because now I think folks are seeing no one is taking a diplomatic off-ramp," McNally said. But he added: "My view remains that the risk of an actual oil supply interruption is fairly low."

One risk for the West could come if Russia decides to retaliate against Western sanctions by carrying out cyber attacks against U.S. or European pipelines, McNally said. The United States accused Russian hackers of mounting last year's attack on Colonial Pipeline, which led to panic buying of gasoline on the East Coast.

Russia's domestic security agency last month arrested 14 alleged members of the REvil ransomware gang, including a hacker that U.S. officials said helped execute the Colonial Pipeline attack.

Russia supplies about 30% of Europe's natural gas, largely through pipelines via long-term contracts. It has played that role for decades, reliably supply gas even during Soviet times.

Laurent Ruseckas, a longtime energy analyst with research firm IHS Markit, said the most obvious risk to those deliveries would come through any war-related damage to Russia's export pipelines running through Ukraine.

Ruseckas said he doesn't see a great risk of Moscow "openly shutting off the gas to Europe" because it wouldn't be in Russia's financial interest.

Yet, Russia in recent months has exercised more subtle control over European gas supplies, by declining to deliver natural gas above and beyond what it is contractually required to supply, Ruseckas said.

In normal times Russia would sell European buyers additional gas supplies as needed, but it stopped doing so in early 2021, helping push up European prices, he said.

Some analysts believe Russia stopped supplying additional gas to protest Germany's delays in authorizing the start of deliveries from Nord Stream 2, which was fully constructed as of last fall.

The lack of extra supply from Russia prompted Europe to lean more on imports of liquefied natural gas (LNG) from the United States and other suppliers, a source of energy that will become even more important to Europe in the event of long-term tensions with Russia, analysts say.

U.S. and European Union officials in recent weeks have pushed Middle Eastern and Asian allies to make more LNG available for European buyers. Qatar's energy minister, Saad al-Kaabi, on Tuesday tempered expectations about extra LNG deliveries.

"Russia (provides) I think 30-40 percent of the supply to Europe. There is no single country that can replace that kind of volume, there isn't the capacity to do that from LNG," Reuters quoted Kaabi as saying during a gas conference in Doha.

Most LNG deliveries "are tied to long-term contracts and destinations that are very clear. So, to replace that sum of volume that quickly is almost impossible," he said.


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