The surge in oil and natural gas prices
- US President announced that U.S. was banning the import of Russian oil, liquefied natural gas, and coal to the country.
- It is aimed at depriving Russia of the economic resources needed to continue its war in Ukraine.
- In the run-up to the U.S. announcement, international oil prices surged to a 14-year high with Brent crude futures hitting $139.13 intraday.
- However, following the U.S. decision, oil prices fluctuated and Brent ended last week at $112.67 a barrel, which was 4.8% lower than the preceding week's close.
Why did the U.S. target Russia's energy exports?
- Russia is the world’s third-largest oil producer, trailing only Saudi Arabia and the United States.
- According to International Energy Agency in January 2022, Russia’s total oil production was 11.3 million barrels per day (mb/d), of which 10 mb/d was crude oil, By comparison, total oil production by the U.S. in January was 17.6 mb/d, while Saudi Arabia produced 12 mb/d.
- In terms of exports to the global markets, however, Russia is the world's largest exporter of crude and oil products and the second-largest supplier of crude to the world with only Saudi Arabia exporting more crude than it.
- Russia is also a major exporter of natural gas and supplied almost a third, or 32%, of the gas consumed in Europe (and the U.K.) in 2021.
- The revenue is made from the sales of oil and gas in 2021 accounted for 36% of Russia's total revenue last year.
- The energy exports were almost half of Russia's total exports last year, helping Moscow achieve a record current account surplus of $120.3 billion, which represented 7% of the gross domestic product in 2021.
- These figures clearly show the significance of oil and gas exports to Moscow and the potential impact any move to completely stop global purchases of these commodities from the country could have on Russia's economy.
What impact could Washington's move have on Russia and on global crude prices?
- Russia has exported more than 7 million barrels per day of crude and oil products last year, the U.S. ban would impact about one-tenth of Russia's oil exports.
- The US said the longer-term goal was to reduce its collective dependence on Russian energy.
- Among its allies, the U.K. announced that it would phase out the import of Russian oil and oil products by the end of 2022, a move that London said was aimed at giving the country's businesses enough time to find alternatives to the supplies, which meet about 8% of demand.
- Still, without the rest of Europe and China joining the import ban on Russian oil and gas, the impact would not be as severe on Russia's economy.
- China, which is the world's largest importer of crude oil, is Russia's single-biggest buyer and purchased about 20% of Russian oil exports, on average in 2021.
- OECD Europe (or European members of the Organisation for Economic Co-operation and Development) collectively accounted for 60% of Russia's oil exports, according to the IEA.
- From the perspective of energy prices, an already tight oil market had been pushed over the edge with the loss of Russian supply
- Many international energy traders had been shunning Russian cargoes of oil to limit financial and reputational risks in the wake of the invasion and the sanctions.
- Crude prices have, however, eased from the 14-year highs hit on the eve of the U.S. announcement as the market has realised that, at least for now, neither a majority of the European buyers nor China plans to stop imports of Russian oil.
What lies ahead?
- Benchmark Brent crude prices fell as much as $4 a barrel, extending last week's decline as traders bet that diplomatic efforts to end the war in Ukraine may help avert a supply shock.
- Prices, however, are still about 40% higher since the start of 2022 after having climbed sharply since Russia's invasion of Ukraine and are still well above $100 a barrel.
- Currently, oil prices are treading water as investors worldwide await the outcome of the meeting of the U.S. Federal Reserve
- Energy traders keep an eye on demand in China, where a recent upsurge in COVID-19 cases has triggered targeted lockdowns in some parts of the country including the southern commercial and trade hub Shenzhen.
- If the Fed raises interest rates, the dollar is likely to strengthen, thereby making imports of oil costlier for net energy importers such as India.