Macro Trends

The New Politics of Oil Trade: Impacts

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  • The Ukraine war has sparked unprecedented levels of government intervention in oil markets, with major implications for the political economy.
  • Sanctioned Russian, Venezuelan and Iranian volumes of crude now amount to 6 million barrels per day, making an already-murky physical market less transparent.
  • While sanctioned crude might be cheap, the overall impact of sanctions and other interventions is seen as driving prices up longer term.

The Issue

Russia's invasion of Ukraine a year ago shocked Europe into a new understanding of its dependency on Russian oil and gas and galvanized Western governments into action. The crisis has generated a constant flow of government interventions on the market — from sanctions and price caps to strategic stock releases and production cuts — some in response to unintended consequences arising from other interventions. This is a far less harmonious oil world, with fault lines between producers and consumers, and the developing world and the West, widening.

Adding It Up

After an initial sanctions response that included targeting Russia's central bank, the West's focus honed in on crimping Russia's energy revenues, with a roiled oil market proving a boon to Moscow's budget. Cue EU bans on Russian crude and products, and accompanying bans on access to European shipping and financial services. The G7 followed with price caps aimed at keeping Russian crude and products flowing (to avoid a global price spike), while limiting Moscow's revenues. Russia has responded in turn: announcing a production cut for March, and introducing new tax legislation aimed at limiting the discount on its crude.

All of this played out against a wider context of unsuccessful US pressure on Opec kingpin Saudi Arabia to open the taps, with the US instead turning to releasing unprecedented volumes from its Strategic Petroleum Reserve, seen by some within Opec as challenging the group's market management. Further, as anti-China sentiment brews in Washington, the House of Representatives in late January passed a bill blocking Chinese companies from buying US strategic stocks — largely a messaging exercise but marking yet another layer in the politicization of oil trade.

Price Impact?

TotalEnergies CEO Patrick Pouyanne early this month summed up just how radically the global oil market has been reshaped. “For me, today, there is no more a [single] world oil market,” he told investors at his firm’s fourth-quarter results. “We have today several markets, which does not help, obviously, to ease the price.” Price discovery on key grades like Urals, which once functioned as an unofficial sour benchmark, is becoming increasingly challenged. Cumulatively, sanctioned volumes make up around 15% of the 45 million b/d of internationally traded crude.

Cheap Russian oil has of course been a boon for the Asian heavyweight economies of China and India. Turkey too has been a big buyer. But quantifying trade volumes, let alone price discovery, has become challenging, and this tanker-tracking problem is especially acute in the case of China. Official Chinese imports of Russian crude have risen, but only modestly. Much of China’s sanctioned imports come via ship-to-ship transfers off the coast of Malaysia and come labeled as “Malaysian” imports. These have skyrocketed, with imports breaching the 1.3 million b/d mark in December. Malaysian well-head crude production stands at a shade below 550,000 b/d.

Massive discounts may have also weighed on flat prices. But in the long run, lower Russian supply — Moscow has already announced a 500,000 b/d cut for March — will begin to tell, with geopolitical jitters of potential further disruption sharpening bullish sentiment. “The other factor that will increase energy prices is higher shipping costs, because tankers now have to travel much further distances,” notes Marianne Kah of Colombia University’s Center on Global Energy Policy.

Mixed Markets

Russian oil flows heading east in theory challenge Opec-plus’ big-hitting Gulf producers in their core Asia market. Serious tension between Opec-plus partners over market share has not emerged, largely because Beijing and New Delhi have largely managed to accommodate both cheap Russian crude and baseload Mideast volumes, by cutting arb grades such as West African, Latin American and North Sea crudes.

Strong demand growth as China's post-Covid-19 economic rebound continues should probably stave off market share tensions this year, too. But the pace of China’s energy transition is becoming ever more critical for both Russia and the Gulf, and on this front, producers should be concerned. Around a quarter of new vehicle sales in China were new energy vehicles last year, rising to 31.8% in December, according to Energy Intelligence’s Energy Transition Service.

‘Mute Mode’

Opec-plus’ response has been to try and ride out the storm, by doing the minimum necessary. Gone are Opec-plus’ regular monthly meetings and kinetic messaging. This "mute mode" not only reflects a response to the challenges posed by constant disruption, but also the negative PR surrounding Russia’s continued participation in the group and the perception by some, especially around its 2 million b/d supply cut decision in October, that the group has taken sides in the conflict.

What's more, Gulf producers more than ever need the firm prices that the West argues help Russia in order to fund their own industrial diversification and wean their economies off oil dependency. Their best bet to influence the transition's trajectory is to use their windfall revenues, generated in part by this conflict, to invest in clean energy and leverage their region’s natural advantages for renewable generation.

Transition Impact

Russia and the West’s wholesale weaponization of oil and gas has transformed the national security threat environment around energy. This extends to clean energy: China’s pre-eminence in that supply chain is clearly a driver behind the US' Inflation Reduction Act, arguably the flagship initiative of Joe Biden’s presidency. This in turn is generating a response from the EU. In the short term, the crisis may have stalled the energy transition on some fronts, with coal usage getting a big boost, while recession fears smothered finance flows to green projects in the developing world. However, the net impact of President Vladimir Putin’s invasion has been to accelerate the energy transition. Western governments “are pushing oil out. It is: ‘We are going green!'’’ oil economist Phillip Verleger says.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Military Conflict, Low-Carbon Policy, Oil Trade, Opec/Opec-Plus, Opec-Plus Supply , Ukraine Crisis
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