In-depth Analysis

Russia’s invasion of Ukraine will push oil to new highs

All bets are off now that Russia has launched a full-scale military attack on Ukraine.

Stock markets are plunging leaving commodities as the current go-to asset, particularly oil. Brent crude is already flirting with $100 a barrel, for the first time since Russia’s first invasion in Ukraine in 2014, and in the weeks to follow is likely to go much higher.

The West has so far only imposed a light level of sanctions on Russia. It is unclear if it will come up with a military response but it has already promised to tighten the existing sanctions. The restrictions will not only affect Russian producers and their exports but also Western companies’ extensive operations in Russia. BP holds almost 25% in Rosneft, Russia’s largest oil producer. Exxon is involved in two major projects in Russia with its Exxon Neftegas recently committing to spend $5 billion over the next five years to boost oil production. Japan’s SODECO and India’s ONGC Videsh also hold stakes in the Sakhalin-1 group of fields while Shell has a stake in the massive Sakhalin 2 gas project. Showing its usual foresight in the market, Glencore has just sold out of its Russian partner Russneft after 20 years of investment.

Oil will flow east

But beyond the first weeks of chaos (Russia has attacked Ukrainian military bases and airports overnight) in which exports of oil to Europe are likely to be disrupted the outflow of Russian commodities will not stop, instead, it will continue to head east.

After Russia’s first move on Ukraine in 2014, the West imposed sanctions that had a severe impact on Russia’s financial system and its ability to do international trade. Looking for a new ally at the time Russia turned east, focusing its trade and financing deals on China. The number of Russian IPOs in Hong Kong spiked as did financing deals with Chinese banks. But after a brief period the “love” cooled down as it became clear that while China will not cut Russia off financially as the West did, it wouldn’t necessarily offer favourable deals. So Russia regrouped and reconsidered. Since then the two countries have reached a tacit understanding to keep some trade going (but not as much as Russia initially thought it would) and that they would back one another up against the West. Given the current frosty relationships between China and the US, China will be happy to step in.

We can already see the flow of oil and gas being reshaped  – since the start of the year, the US has been shipping gas to Germany to make up for the shortfall from Russia. Now more Russian oil and gas will head east and could end up affecting how much oil China buys elsewhere.

China currently buys about 15% of Russia’s total crude oil exports, averaging nearly 1.6 million barrels per day. There is scope for an increase here because that makes up only 15% of China’s total crude oil imports. Other countries Russia sells to in Asia are Japan, South Korea and Vietnam.

In the short term, the disruption in the market is likely to push crude oil prices higher by tens of dollars per barrel, in the medium term this is likely to settle slightly, leaving the market with reshaped supply flows.


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