Oil prices continued to rise this week with benchmarks reaching the upper $80s on Wednesday.
Tight fundamentals and expectations of strong demand in 2022 have fueled the recovery, but geopolitical issues are also affecting prices. This week has seen rising tensions in Europe, a drone attack on oil tankers in the United Arab Emirates and an explosion on an oil pipeline between northern Iraq and Turkey.
Although neither the drone attack nor the pipeline explosion (caused by a downed power line) caused any significant damage or impact on oil flows, tensions in Europe between Ukraine , Russia and the United States remain a significant geopolitical risk for oil markets.
Here’s a look at the potential for a Russian invasion of Ukraine and its impact on energy markets.
How likely is Russia to invade Ukraine?
According to Congressman Brian Fitzpatrick, a former FBI agent who was stationed in Ukraine, US intelligence reports indicate that there is more than a 50% chance that Russia will invade Ukraine next month.
White House spokeswoman Jen Psaki indicated a similar assessment from the White House. AT Report On Tuesday she said:
“We believe we are now at the stage where Russia could launch an attack on Ukraine at any time.”
Although the American political establishment seems quite convinced that a military engagement between Russia and Ukraine is more likely than not, others are less certain.
According to the Secretary General of NATO, there is a risk of military conflict, but it “does not seem imminent”.
Russian Deputy Foreign Minister Sergei Ryabkov denies that Russia intends to send military forces across the border, saying there is “no plan, no intention to ‘attacking Ukraine’.
Some analysts believe that Russian energy sales to Europe are too big for the Russian economy for Putin to risk causing any disruption that an invasion could cause. Other analysts believe that Russia is in good financial and economic shape to withstand the economic setback by the United States and the EU that could result from an invasion.
Other analysts believe Russia does not believe the military and political conditions are appropriate for military intervention. For example, Eugene Chausovsky argued in Foreign Policy that, based on an analysis of past Russian military engagements and non-engagements, conditions in Ukraine do not meet Russian standards for invasion.
Taras Kuzio argued in an article for the Atlantic Council that a lack of popular support in Russia for a full-scale invasion of Ukraine will prevent Putin from pulling the trigger.
If Russia invades Ukraine, the West is not prepared to respond militarily. Ukraine is not a member of NATO, so the organization is not required to defend Ukraine’s borders.
President Biden also said he would not send US troops to the region. However, the US and UK have pledged to send “defense weapon systems” to Ukraine, with the US pledging to provide Ukraine with $200 million in military aid. dollars, including “Javelin anti-tank missiles, Stinger missiles, small arms and boats. ”
Besides defensive military supplies, the US response to a Russian invasion would be primarily economic and financial. The United States has promised “unprecedented” sanctions to members of Vladimir Putin’s “inner circle”.
Sanctions against Russians are unlikely to have a significant impact on the market. However, some analysts believe such sanctions would cause Russia to retaliate by restricting the flow of oil and coal to Europe. This, in turn, would impact oil and gas prices.
Germany has threatened “consequences” for the Nord Stream 2 gas pipeline, a major natural gas line linking Russia and Germany that was recently completed but is not yet operational. The German Foreign Minister said that “this pipeline could not go into operation” if Russia continues to escalate the situation with Ukraine.
As a last resort, nations considered disconnecting the Russian banking system from the SWIFT international payment system. According to reports, this option is not an option because it would excessively destabilize world markets, but during a press conference on Wednesday afternoon, President Biden said journalists that if [Russia’s] will invade, they will pay. Their banks will not be able to transact in dollars,” which seems to imply a threat to cut Russia off from the SWIFT system.
Possible impacts on the market: destabilization, price spikes
Europe’s energy supply situation is already precarious, so an interruption in the supply of Russian oil, natural gas and/or coal would be disastrous. It could plunge European countries into darkness, cutting off heat and power to millions of homes and businesses during the winter months.
Energy prices in Europe would skyrocket. Oil prices would be immediately impacted and would increase globally. Natural gas and coal prices in various regions would also be affected, although less immediately and significantly than oil prices, as these commodities are not traded as globally as oil.
It is likely that high prices in Europe would help redirect supplies of oil, natural gas and coal from other parts of the world to European markets. However, there is not enough oil and gas capacity available worldwide to fully replace Russian supplies in Europe.
According to a Reuters report, the US government has already discussed with several international energy companies creating contingency plans to supply Europe if the Ukraine conflict cuts off supplies. (Russia supplies the EU with about 1/3 of its natural gas needs).
The companies told the White House that the supply of natural gas was limited and that they did not have enough reserves to supply sufficient quantities to Europe to replace Russian gas.
It is possible that under pressure from the White House, or with specific exemptions from the regulations provided by the White House, suppliers may increase production and exports of oil and gas, or even postpone the maintenance of certain fields in order to ramp up production, but there is no indication that they have engaged in any such plans.
Increased supply could help mitigate high oil and gas prices, but unless detailed contingency plans are in place before a geopolitical conflict occurs, the market will experience a period of high prices while logistics are resolved. settled and that production and exports are accelerated.
Financially, disconnecting Russia from the SWIFT system would prevent EU countries from buying Russian energy in dollars. They could potentially transfer purchases from dollars to euros, but they would still have to find a way to transfer the funds.
The move could hurt Russian energy companies and weaken the . However, Russia could continue to sell oil and gas to China, especially since Russia is already accepting payments in .
According to reports, the two countries already have an alternative system to SWIFT. In fact, other countries could join the Russia-China system, nullifying the American advantage of controlling SWIFT. This could lead to more Russian oil and gas flowing into China, potentially displacing supplies from the Middle East and destabilizing the OPEC+ group.