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Energy Markets Didn't React As Expected To Russian Sanctions

Published 07/21/2022, 05:43 AM
Updated 07/09/2023, 06:31 AM
  • Russian oil did not come off the market when sanctions were introduced
  • In reality, demand for Russian oil increased
  • Growing unwillingness in Europe to sacrifice economic growth for Ukraine

It has been almost five months since Western Europe first started to obstruct the movement of Russian energy resources in response to Russia’s actions in Ukraine. On Feb. 22, German Chancellor Olaf Scholz suspended the certification of the Nord Stream 2 pipeline, which was ready to start delivering natural gas to Germany.

Since that time, we have seen a declaration of sanctions that forced western oil and gas companies to exit projects in Russia; export controls on products that would support the Russian oil and gas industry; a U.S. ban on importing Russian oil, natural gas and coal; and commitments from Britain and the E.U. to phase out or ban the importation of Russian oil, petroleum products and coal delivered by sea at later dates.

So how have these actions impacted the market, and what we can expect with regards to Russian oil and gas in the future.

1. Re-routing of oil and gas flows

As I predicted, Russian oil did not come off the market when the west shunned it. After a brief period where Russia cut some production, Russian oil companies found new customers in India and China. They offered significant discounts to refiners that were willing to pay for, transport and insure the oil. As oil prices soared into the triple digits, these discounts made Russian oil even more attractive. Russia opened a huge new market for its oil in India and substantially increased its exports to China. In fact, Russia has overtaken Saudi Arabia as the top supplier to China. Meanwhile, Saudi Arabia’s sales to China have dipped. In May, Russia became India’s second largest supplier of oil, sending 819,000 bpd of oil to Indian refiners. This is up from just 75,000 bpd last year. Less Russian oil is heading to Europe and much more is heading to Asia.

India and China’s appetite for discounted Russian oil is likely to continue for as long as oil prices remain high (or at least higher than the discounts they get from Russia). There is some discussion that the U.S. may try to impose secondary sanctions on companies that import Russian oil, however this will be extremely difficult to implement. Expect the elevated oil flows from Russia to India and China to continue while displaced Saudi oil may end up in Europe.

2. Russian production and revenues are up

The point of the sanctions and bans was to cut Russia’s revenue from oil. However, these sanctions, most of which don’t actually go into effect until December, have actually done the opposite. As oil prices rose (in part due to these actions) discounted Russian oil became more attractive to non-western countries. They found ways to subvert sanctions on banking transactions and maritime insurance, and soon the demand for Russian oil was actually higher than supply. In response, Russian oil companies have increased production, pumping an average of 10.78 million bpd in July. This in an increase of nearly 1 million bpd compared to Russia’s production in June, which, according to Platts, averaged 9.75 million bpd. According to U.S. officials, Russia’s oil revenue has increased by 50% from the start of 2022. Expect Russian oil revenues to remain elevated for as long as the sanctions remain in place, barring a serious global recession. The G7 has been discussing plans to institute a “price cap” on Russian oil, but it is unclear how this price cap will be enforced, and it is extremely unlikely for any such mechanism to be implemented before December.

3. Europe’s need for Russian energy outweighs its politics

Despite its talk about cutting off Russian energy revenue to punish Russia for its military operations in Ukraine, Europe has continued to buy Russian oil and gas products. In July, 60% of Europe’s imports of diesel fuel came from Russia. However, the E.U. agreed in May to cut 90% of its petroleum imports from Russia by the end of 2022. The E.U. is also calling on all European nations to cut their natural gas use by 15% from August 2022 to March 2023. The idea is to reduce Europe’s dependency on Russian natural gas and cut Russian natural gas revenues. In the event of a supply emergency, the European Union could make the cut mandatory. Already, some European nations are pushing back. Spain, for example, which has other sources of natural gas, does not support the proposal, because it calls for an economic sacrifice that they believe is unwarranted. Traders should not assume that these cuts, bans and sanctions will all be implemented as written, given the growing unwillingness in Europe to sacrifice on behalf of Ukraine. Expect that Europe’s desire for energy will continue to outweigh politics.

DIsclaimer: I have no positions on any of the commodities mentioned in this article.

Latest comments

Great article.
Thanks great articles
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Thank you, enjoyed the article.
Part 3  Weapons & more weapons! The way wholescale escalation of unprecedented military aid to Ukraine has been done, haphazardly with no oversight leads to the likely possibility of military grade weapons falling into the hands of criminal elements, plus opportunities for graft & corruption in & outside Ukraine The law of unintended consequences applies, for emotion driven actions devoid of thought of future results & Realpolitik. No leader, & especially not those in the US, seem to want or have made any attempts to de-escalate. "No! Russia must be punished!" is the rallying cry.  Economically, the domestic economies of the UK and Europe & everybody suffer, except connected people in the "military industrial complex".  All the billions- thousands of millions of $/pounds/ Eu) spent is $ that will not be spent on domestic healthcare, education & infrastructure. Not that it is real money anyway. It is all deficit spending from taxpayers that will have real consequences far into the future.
Part 2 The horrible situation in Ukraine requires an unbiased understanding of the underlying complicated historical and realpolitik reasons. Ukraine never made any serious attempt to implement the Minsk II agreement, which would at least have provided a reasonable means to maintain Ukrainian sovereignty while giving the Donbass a degree of autonomy,  Russia bears ultimately responsibility in invading, but Putin knew this action would hurt Ukraine, Russia and Europe & would result in Russia becoming a pariah state. But Putin still viewed this choice as the lesser of two evils, a viewpoint that the West did everything to amplify and nothing to dissuade.
Part 1:  Nordstream II was finally completed and operationally ready (over the objections & sanctions of the US) by end 2021, but stopped administratively & politically by certain elements from operating even way BEFORE the war & not just in Feb 2022.     A strange situation for Russia & its customers. Your customers openly supply weapons to use against you, but still expect, nay, demand that u continue to supply them with gas - but also doesn't allow u payment in a preferred currency & further expect to dictate the price at which it is to be sold to them?  Too bad, if trade was allowed to flourish, wars might be less inevitable. After all, it doesn't make sense to destroy one's best customer or supplier.
Well put. We all do not share the same ideals
No. Disappointingly, some cultures and nations turn away from an assessment of the morality of Russia's attack. Still others may share ideals, but are not free to say so. And then, of course, there are the warmongers within Russia who find it acceptable to attack and pillage a people because of a fake pretext. There are no ideals that would justify sending 50,000 Russian fathers and sons to ignoble deaths for a lie -- only lunacy.
seriously these so called chosen is manipulating life of poor and middle class,
I agree. It is inhumane the way Russia is throwing poor and middle class to their deaths.
Use of the phrase “military operations in Ukraine” give you the air of a fellow traveler. As we all know, Russia forbids the use of the term war but you must call it what it is.
for her PhD!
Or terrorism: especially storing weapons and explosives in critical areas of nuclear power plants.
Yes, that was strange, but I wouldn't jump to conclusions. The author is a senior fellow at the Atlantic Council, a think tank that Russia has described as a threat to its system and which it added to its list of "undesirable" organizations, barring it from Russia. So...
Nice article
Can you imagine where energy prices would be if Russia did not sell their energy? Everything would be double in price. With the West shutting down production of oil and gas to end fossil fuels, we were lucky to get 8-dollar gas and 130-oil. Will be doubled in 2023.
There are always two sides to the coin. The other one being russian oil continues selling at pre-sanctions levels to some buyers while others chose to make their own people pay a premium. Further slowing down own economies after covid but who in their right mind would want to lobby that 🤷‍♂️
Great article
Please explain how actually rerouting of Russian oil and gas to China and India will happen without large oil/lng tanker fleets. It will take a lot of money and around 2-3 years for Russia to built own ships. Currently All LNG and oil tanker fleets are controlled by western companies. And I don't speak even for LNG/Oil terminals and all necessary infrastructure required. (Russians still don't have). All of russian natural gas and oil are transported by pipelines. So please explain how rerouting will happen 😁
Off course Europe also does not have enough lng/oil terminals as all natural gas supplies came from Russia by pipelines network left from ex.comunist era(All Eastern/Central European countries +Italy +Germany and Austria)
This is some funny disinformation lmao
Ian, You obviously didn't read the article or maybe that Russophobic jerking of the knee is affecting your reading comprehension.
Thanks Ellen.
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