Oil prices surged Monday morning to highs not experienced since 2008 as bans on Russian crude seem more likely, and delays in a US-Iran deal raise questions about supply relief.
The US is staring down the barrel of a supply crisis, with gasoline prices already soaring nationwide, and the Biden administration appears open to exploring alternative sources such as Venezuela, where sanctions have kept crude imports off the market for years.
To date, the West’s financial sanctions against Russia have not proved effective in de-escalating the conflict in Ukraine.
Expanding sanctions to include physical commodities, including Russian oil exports, is definitely on the table.
The impact of a US unilateral ban would be minimal, only impacting about 100,000 bpd of crude exports from Russia.
If the US can encourage Europe to participate in the embargo, the continent would be blocking about 3.8 million bpd monthly average of Russian crude imports.
The EU agreeing to an outright ban on Russian oil is unlikely given its member’s dependence on the fuel.
The daily operations at many European refineries rely on a Russian crude diet, mainly imports of Urals.
Italy, the Netherlands, France, Romania, and Poland are some of the largest importers of Russian crudes, and many of these countries have continued to receive deliveries that were fixed before the invasion of Ukraine, fulfilling already completed transactions, as the time lag between orders and loadings is usually in 10 or 25-day intervals.
An outright export ban on Russian crude from Western countries could wipe out as much as 4 million bpd, and participation from China and India would take even more barrels off the market.
In addition to Russian barrels at risk of upstream disruption, regional producers Kazakhstan and Azerbaijan, which send a large portion of their exports to the global market via Russian pipelines and ports, are also in jeopardy.
Kazakhstan sends significant volumes of its light-sweet CPC blend that it produces at the Tengiz, Karachaganak and Kashagan via Russia, but a small portion goes directly to China and would not be affected.
Azerbaijan sends its BTC blend produced offshore in the landlocked Caspian via the Baku-Novorossiysk pipeline, and there are few alternatives for rerouting.
In total, the FSU countries export about 6 million bpd from Russian ports and pipelines.
Also, the escalating conflict in Ukraine and the strengthening prospect of sanctions on Russian energy are driving gas prices to new record highs Monday.
The TTF has smashed previous price ceiling assumptions as the benchmark contract hit $115/Mmbtu this morning, before declining to $93/Mmbtu at the time of writing.
The eye-watering risk premium suggests expectations that gas flows will potentially be disrupted by sanctions on Russian energy exports or damage to pipeline infrastructure, or simply a halt in flows from either side.
It also mirrors violent movements in Brent oil prices which briefly exceeded $139/Bbl earlier in the day.
At these prices, we are likely approaching the limits of affordability in Western Europe.
The market will be looking for indications from the scheduled third round of negotiations between Russia and Ukraine today, though expectations of a breakthrough remain low.
Unfortunately, gas fundamentals offer little insight into this wartime volatility.
Russian pipeline flows remain stable, including flows through Ukraine, which stand at ~81 MCMD.
Flows out of Norway are marginally down from Friday at around 343 MCMD, due to an unplanned outage at Kollsnes.
LNG imports into Western Europe totaled 1.15 million tonnes so far in March, compared to 1.36 million tonnes in the first week of February.
The TTF-Asia LNG spread has never been more negative, which should tilt all marginal Atlantic origin cargoes to Europe.
Temperature forecasts have been revised upwards, and wind generation output is expected to strengthen in the coming weeks, both of which will, thankfully, reduce gas demand.
The overall pessimistic macro sentiment has weighed heavily on the EU ETS, which has dropped 11% since Friday amidst concerns over potential demand destruction from the stagflationary impact of high fuel prices.
In Asia, weather-driven demand is unlikely to emerge in the near term as temperature forecasts are trending well above normal.
However, the market is keenly watching the developments at the LNG sector’s latest outage at the second train of Malaysia LNG Satu, reported last week.
In South Korea, Korea Hydro and Nuclear Power reduced output at the Hanul nuclear power plant due to a nearby wildfire, which likely increased the call on gas-fired generation as stringent coal capacity restrictions are in effect through March.
