Russia is a key player in the global energy markets and one of the top oil producers in the world. Since the beginning of its attack on Ukraine, the oil and gas markets have gone through a new wave of uncertainty and destabilization. The news of the war has sent the world’s inflation higher and took oil and gas prices to unprecedented levels since 2014. The attempts by European countries and the U.S. to punish Russia through sanctions including measures against the oil and gas sector have doubled the worries about supply and prices.
The Break Out
Russia is the third-largest crude producer and the second natural gas producer in the world. According to the International Energy Agency (IEA), oil and gas represent 45% of Russia’s federal budget. As a result, once Russian President Vladimir Putin announced his military operation in Ukraine on February 24, 2022, oil prices jumped by around 5% to reach $102.48 per barrel during the first hours of the day.
At the same, time U.S. West Texas Intermediate (WTI) crude future recorded $96.95 per barrel. Oil prices continued in their upward trend to reach $139 per barrel in early March. At the end of March, the prices recorded $108 a barrel. However, it decreased in April to an average of $105 per barrel, according to EIA.
Responding to the war, the U.S. administration along with the European Union (EU) announced on March 8, 2022 its decision to ban oil imports from Russia as part of their sanctions against Russia. The European Commission published plans to decrease its reliance on Russia gas by two-thirds before the end of 2022 and to fully end the imports before 2030. “That means Russian oil will no longer be acceptable in U.S. ports and the American people will deal another powerful blow to (Russian President Vladimir) Putin’s war machine,” U.S. President Joe Biden said to reporters at the White House.
Sanctions against the Russian oil sector could spell trouble for the country’s economy, according to analysts. As one of the world’s largest producers and exporters, oil is considered a key source of income, essential for sustaining economic growth..
The U.S. oil imports from Russia recorded 16 million barrels until February 2022. The U.S. sanctions were not limited to the imports embargo, as several giant international oil companies (IOCs) announced their exit from Russia.
Big names such as Equinor, TotalEnergies, BP, Shell, ExxonMobil, and Baker Hughes took the decision either to exit their investments there or stop introducing any new investments.
In Search of Alternatives
Following the decision to ban Russian oil imports, European countries and the U.S. started to find other alternatives to compensate for Russian supplies. The UK was one of the first countries to announce boycotting the Russian energy imports, which represent 4% of the country’s supply. For finding alternatives, UK Prime Minister, Boris Johnson, visited Saudi Arabia and the UAE to discuss energy security.
Meanwhile, Germany, one of the top Russian gas importers, declared plans to establish a liquefied natural gas (LNG) terminal to boost its imports from other countries rather than Russia. This is besides its efforts to reach agreements with UAE and Qatar to develop LNG and hydrogen projects.
In the meantime, Italy decided to install two floating storage and regasification units (FSRU), aiming also to increase LNG imports. The country also entered negotiations with Libya and Algeria to examine opportunities for supplying clean energy.
In an attempt to contain the implications of the Russian war on oil prices, the International Energy Agency (IEA)’s members agreed on March 1, 2022 to release 62.7 mmbl of oil from their emergency reserves. Moreover, on April 1, 2022, they agreed to release further 120 mmbl from the emergency reserves.
For its part, Japan announced, in April, that it will release 6 mmbl of oil from its private reserves. The U.S. increased its LNG supplies to Europe. Additionally, Germany and Norway cooperated in building hydrogen pipeline to help phase out Russian energy. The U.S. and IEA called on the Organization of Petroleum Exporting Countries (OPEC) to pump more oil to balance oil markets and ease the prices. However, OPEC refused their request, stating that “current volatility is not caused by fundamentals, but by ongoing geopolitical developments”.
This pushed the U.S. Senate committee to pass the “No Oil Producing and Exporting Cartels” or “NOPEC” bill which could expose OPEC members to antitrust lawsuits for orchestrating supply cuts that raise global crude prices.
However, some countries opted to consolidate their deals with Russia, taking advantage of Russian oil low prices. India was one of these countries that hurried to secure Urals oil contracts covering March, April, May and June.
The EIA expected that brent prices will reach an average of $107 per barrel in 2Q22 and $103 per barrel in the H2 2022. The EIA noted that this price forecast is not confirmed as “actual price outcomes will largely depend on the degree to which existing sanctions imposed on Russia, any potential future sanctions, and independent corporate actions affect Russia’s oil production or the sale of Russia’s oil in the global market.” However, it is expected that oil markets will be mostly balanced from Q2 2022 through the end of 2023. “Because oil inventories are currently low, we expect downward oil price pressures will be limited and market conditions will exist for significant price volatility”, said EIA.