November 30, 2022

Russia’s energy role in global trade

NEW YORK — The invasion of Ukraine has sent ripples through the global energy markets due to Russia’s role in the crude oil and natural gas exports.

“Russia produces more than 10 million barrels of crude oil a day — 10% of global supplies. It’s a top 3 global supplier alongside of the U.S. and Saudi Arabia, and exports more than half of its crude oil production to overseas markets,” said Ryan Fitzmaurice, Rabobank energy commodity strategist, during a March 1 press call.

Russia is also a meaningful exporter of refined products such as diesel, gasoline and other oil-related products. Russia joined an alliance with the OPEC+ member nations in 2016, and the goal there is to stabilize global energy markets.

Natural Gas

“In terms of natural gas, it’s the same story. Russia is a very significant supplier alongside the U.S., Qatar and Australia. Russia produces significant amounts of natural gas both for its domestic use and for export. Russia exports its natural gas via an extensive pipeline network to Europe and Asia, as well as via waterborne liquefied natural gas terminals,” Fitzmaurice said.

“So, who’s at risk from the recent escalation? Europe is most at risk of a physical supply shock, while the U.S. is more at risk of a sticker shock both at the pump and at home.”

In terms of Russia’s foothold into European energy markets, Russia controls more than 30% of European oil imports and 35% of European natural gas imports.

“Europe is most at risk of a physical supply shock, while the U.S. is more at risk of a sticker shock both at the pump and at home.”

—  Ryan Fitzmaurice, energy commodity strategist, Rabobank

Russia maintains a strong foothold into European energy markets because of its extensive and cost-effective pipeline network.

That European pipeline network stretches from the oil and gas fields of western Siberia to end-user markets in Europe with various arteries along the way, giving Russia that significant financial edge over competing waterborne imports.

“The balance of Russia’s exports are primarily sent to Asia, although the U.S. does import some crude oil and some refined products, those flows could easily be replaced. Those are not significant to the U.S. balance sheet,” Fitzmaurice said.

“In terms of what we know now, the west has implemented harsh sanctions on Russia and has greatly hindered its ability to deal in financial markets and to execute transactions.”

Energy has been specifically carved out of those sanctions and the Society of Worldwide Interbank Financial Telecommunication, or SWIFT, financial system action to maintain orderly commodity markets.

However, considering these actions, European companies are already backing away from doing business with Russia, given the increased risks and despite positive economics.

“For starters, BP and Shell, two of the European global oil majors, have rushed to divest their Russian joint ventures. We’ve also seen a number of European refiners scrambling to replace the Russian crude oil grades that they’re accustomed to with alternatives such as the pricier North Sea Brent crude oil grades,” Fitzmaurice said.

“That leads us to the potential price impact. In terms of what we’ve done as a Rabobank research team in the lead up to the invasion we were modeling different scenarios planning for these events.

“We had a scenario that involved war without sanctions, a more of a quick war that Russia would return to the market, and we had a scenario that also included war with effective sanctions.

“As it stands, we’re now sitting closer to that second scenario given that we are seeing an actual war occur and we are seeing sanctions. The fact of the matter is we haven’t seen a supply disruption yet, but I think that is certainly a risk as we move forward.”

Historical Perspective

The last real oil shock to Europe and the global market was during the Libyan civil war in 2011.

“During that event we saw the in-fighting in Libya drop European exports to effective zero from about 1.25 million barrels a day. The price response during that event was Brent crude moving from roughly $90 a barrel to $125 a barrel in just four months. We certainly could see a move similar in scope to that and potentially even more upside given Russia’s much greater stature in energy markets,” Fitzmaurice continued.

“In terms of natural gas, specifically in Europe, we see the biggest price impact given their dependency on Russian gas and the fact that there’s already a crisis going on for natural gas supplies anyway in Europe and Asia. We see them spiking to over $200 a barrel in oil-equivalent terms.

“For U.S. natural gas prices, we don’t expect to see the same sharp reaction. We do expect U.S. prices to maintain its significant cost advantage over global supplies.

“However, we would expect the arbitrage which is extremely wide right now to narrow with U.S. prices increasing potentially with Henry Hub natural gas futures finding a new trading range going forward from $4 to say $5.50 per million Btu, versus what the market has been accustomed to in recent years which is more like $2 to $3.50.”

Tom Doran

Tom Doran

Field Editor