With the Russian invasion of Ukraine already playing out, it is clear that the war between US and allies on one side and Russia on the other would be fought not just at the military and economic levels, as already manifested by the western sanctions, but with another strategic weapon as well: energy.
As a resurgent energy superpower, the Biden administration has enough clout to convince the world, particularly in Europe, that the US could help blunt the impact of the one major pain that nations could face in the event the oil and gas spigots are turned off or supply is critically reduced.
Given its newly acquired energy clout, the US may have to rely less on its oil- and gas-rich allies in the Middle East to talk up their spare capacity to reassure markets and consumers of a quick fill-up in the gap, if such a situation ever arose. But the key question is how soon the US is ready to step in to steady the supplies.
From the macro point of view, oil markets are rattled by the war as Russia is the world’s second-largest crude oil producer after the US and the second-largest exporter after Saudi Arabia. But according to analysts, the unease is even more so due to OPEC+ and its inability to close the current supply gap.
Crude markets are manifestly in short supply, with a deficit of around 1.5 million barrels per day (bpd) in January, as demand averaged 82.2 million bpd against supply of 80.7 million bpd. This spread is set to widen to more than 2 million bpd over summer.
Analysts are attributing this shortage to ‘engineering’ by Saudi Arabia, which is not ready to fully open the taps, despite the fact that the kingdom is sitting on 2 million bpd of spare capacity, in coordination with other producers such as the UAE, which also has significant spare capacity. The gap obviously serves the producers as each barrel rings their cash chests with significant additional dollars.
According to Rystad Energy research head Claudio Galimberti, the Ukraine war could put at risk disruption of up to 700,000 bpd of Russian crude exports. The Southern Druzhba pipeline flows through Ukraine, accounting for 250,000 bpd of throughput, while the port of Novorossiysk, capable of 460,000 bpd), is just off the east of Crimea and south of the Sea of Azov, the epicenter of the war.
The conflict could also trigger an increase in oil demand by raising the natural gas price further and thus driving the switching from gas to oil in the power generation sector, as is already being witnessed in some Asian countries, resulting in approximately 500,000 bpd of additional demand.
According to analyst expectations, US producers would probably hit the pedal in full throttle only next year, as production will increase from 11.7 million bpd to 12.6 million bpd by December this year. When this happens, it would release approximately 1 million bpd of oil by the end of 2023, leading to a patently oversupplied market. This in effect could mean that the price band could range between the upper $80s and the lower $90s.
European gas prices have already surged, increasing back above $30 per MMBtu. This, paired with current storage inventories in Europe continuing to remain below the five-year average, has resulted in significant global market uncertainty.
European prices will skyrocket if Russian supplies are cut off and this could lead to a dynamic switch from gas to all other energy sources – more hydro, biomass, coal, nuclear and liquids, points out Rystad’s gas market analyst Emily McClain. If Russian gas supply is upended, heightened uncertainty and concerns will push up US prices as well, though for a limited period as it is believed to have healthy storage inventories. She feels that Europe, however, will need a significant supply of incremental LNG as domestic production is already strapped.
With American LNG export facility utilization rates already maxed out, this is expected to create perfect conditions to see more US cargoes getting re-routed to Europe from Asia and other places. US exports make up nearly half of the total share into Europe, making it difficult to estimate how much more could be rerouted and from where. (IPA Service)
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