Oil and Gas Prices Soar and Worries Rise About Future Supplies - The New York Times

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Crude oil prices

Source: FactSet

By The New York Times

Russia’s invasion of Ukraine caused a surge in energy prices on Thursday, adding to worries over tight supplies and raising fresh questions about the flows of oil and gas from Russia into Europe in the months ahead.

Brent crude broke through the $100-a-barrel marker, surging more that 6 percent to above $103 a barrel, its highest in more than seven years. West Texas Intermediate crude briefly rose to above $100 a barrel.

The flow of natural gas in Europe is more likely than oil to be disrupted by conflict in Ukraine, analysts say. Its price jumped by almost 19 percent to 105.6 euros a megawatt-hour on the TTF exchange in the Netherlands.

The extent of the Russian military operation ordered by President Vladimir V. Putin appeared to surprise some market participants, and could explain the powerful jump in prices, said Richard Bronze, head of geopolitics at Energy Aspects, a research firm,

“There was a mistaken view in the market as recently as yesterday that either Putin had gotten enough to pause or that things would be limited to the Donbass,” the disputed region in eastern Ukraine, he said.

What the energy markets are mainly worried about, he said, are the Western sanctions that are likely to be imposed in response to the invasion. The concern is that those financial penalties will disrupt oil and gas flows from Russia, despite assurances to the contrary by Western officials.

Mr. Bronze said that some buyers were steering away from purchases of Russian oil while they waited to see the scope of the sanctions that emerge.

In the longer term, Moscow’s aggression against its neighbor and the implied threat to European and global energy supplies are likely to lead to Europe putting much more effort into weaning itself off dependence on oil and, particularly, natural gas imports from Russia, analysts say.

Russia supplies more than a third of gas supplies to the European Union. Pipelines feed the fuel through Ukraine, although the volumes through those conduits have been reduced in recent months. Europe is also a large buyer of Russian oil.

The conflict is occurring when supplies of both oil and natural gas have already been tight for months, driving up prices and creating a situation where the risk of disruption sends them up further.

In the case of oil, the key question is likely to be whether flows are disrupted as a result of sanctions. Russia is the producer of about one in 10 barrels of oil globally, so any conflict involving it is deeply worrying to oil traders.

If oil prices continue to rise, pressure will grow on countries like Saudi Arabia and the United Arab Emirates — two of the countries thought to have room to increase production — to raise output.

OPEC Plus, a group made up of OPEC and other producers including Russia, has been falling well short of its production targets and has already been pressed by both Washington and the International Energy Agency to step up. Russia, however, is a co-leader of the group along with Saudi Arabia, and so such discussions might be awkward.

Russia’s Attack on Ukraine and the Global Economy

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A rising concern. Russia’s attack on Ukraine could cause dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.

The cost of energy. Oil prices already are the highest since 2014, and they have risen as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.

Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.

Food prices. Russia is the world’s largest supplier of wheat and, together with Ukraine, accounts for nearly a quarter of total global exports. In countries like Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat imports.

Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.

Financial turmoil. Global banks are bracing for the effects of sanctions designed to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.

OPEC Plus plans to discuss the oil market at its regularly scheduled meetings on Wednesday.

The International Energy Agency, which would probably coordinate a response to a severe hit to global supplies, said that its member countries that are net importers of oil are required to hold 90 days of reserves.

The agency said Thursday that “most immediately at risk” was 250,000 barrels a day of oil from Russia that transits Ukraine to Hungary, Slovakia and the Czech Republic. That amount is relatively small in a global market that consumes 100 million barrels a day, but could create problems for those countries.

In terms of natural gas, the question will be whether Russia continues to supply major customers like Germany and Italy or chooses to use the fuel as a weapon in retaliation for sanctions. Germany’s chancellor, Olaf Scholz, on Tuesday halted the certification of Nord Stream 2, the new $11 billion gas pipeline linking Russia and Germany, prompting an angry reaction from Russian officials.

If Russia cuts back on gas exports, then Europe will try to make up the difference from already strained supplies kept in storage facilities, and by scouring the world for more liquefied natural gas. Flows of LNG, mostly from the United States, have exceeded Russian gas volumes to Europe in recent weeks. Such measures would probably help western European countries like Germany and Italy more than those in the eastern and southern Europe with fewer alternatives to Russian gas.

Even without a clear cutoff of fuel by Moscow or a disruption by war, there is a substantial risk, analysts say, that the extraordinarily high gas and electricity prices that have dogged Europe in recent months will continue indefinitely, squeezing already hard-pressed consumers and, possibly, pushing more businesses to curtail production. In recent months, some energy-intensive businesses, including fertilizer makers, have announced closures because of high gas costs.

The suspension of Nord Stream 2 may be one of the first moves in the reorienting of European economies away from dependence on Russia, but such a big shift involving many billions of dollars of investment will take time.

“You are going to see, certainly, Europe having a much stronger focus on reducing its dependence on Russian energy supplies over the medium and longer term,” Mr. Bronze said. “But that is an incredibly hard ask.”

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