Further Volatility Expected In Oil And Gas Market Amid Growing Ukraine-Russia Conflict

By Siti Radziah Hamzah KUALA LUMPUR, Feb 28 (Bernama) -- Crude oil prices are expected to experience further volatility on the heels of the intensified Ukraine-Russia conflict in addition to the supply crunch which has sent the energy prices higher recently. Russia’s invasion of Ukraine is expected to have far-reaching implications for energy markets given Moscow's role as the world's second-largest producer of natural gas and one of the world's largest oil-producing nations. According to the United States (US) Energy Information Administration in December 2021, Russia was the world’s third-largest producer of petroleum and other liquids after the US and Saudi Arabia in 2020; it had an annual average of 10.5 million barrels per day (bpd) in total liquid fuels production. Europe is Russia’s main market for its oil and natural gas exports, and by extension, Europe is its main source of revenues. Russia is a major source of oil and natural gas for Europe, with a significant share of the continent’s oil and natural gas imports coming from Russia. Russia also was the second-largest producer of dry natural gas in 2020, second to the US, producing an estimated 22.5 trillion cubic feet. EUROPE'S DIVERSIFICATION AWAY FROM FOSSIL FUELS Institute for Democracy and Economic Affairs (IDEAS) senior fellow and Asia School of Business assistant professor of business and society Dr Renato Lima de Oliveira said volatility and further price increases are expected in the short run. However, in the medium run, the conflict would strengthen the calls in Europe to diversify away from fossil fuels, particularly to replace the 40 per cent of natural gas that comes from Russia, he pointed out. "The truth is that European allies have been holding back their reaction to Russia’s threats and actions because of this energy dependency, which weakened Europe’s ability to respond. I expect an even stronger push towards renewables in the continent in order to replace fossil fuels or some revival of clean nuclear power. "This will be driven by the existing higher prices of gas, which makes alternative sources comparatively cheaper, but also by a sense of achieving energy security and sovereignty," de Oliveira told Bernama. At the time of writing, international benchmark Brent crude increased 4.06 per cent to US$101.91 per barrel as Russian President Vladimir Putin put his country's nuclear deterrent on high alert amid escalating sanctions against Russia. On Saturday, the US and its allies moved to block certain Russian banks' access to the SWIFT international payment system in further punishment of Moscow as it continued its military assault against Ukraine. On Feb 24, oil prices jumped following the Russian invasion of Ukraine, with international benchmark Brent crude surpassing US$100 a barrel for the first time since 2014. Brent crude futures rose more than 8.0 per cent at one point to hit a session high of US$105.79 per barrel, the highest level since August 2014, while US West Texas Intermediate crude futures climbed over 9.0 per cent to trade as high as US$100.54, a price last seen in July 2014. According to de Oliveira, a major and prolonged war involving a huge energy producer like Russia could definitely affect the oil market, which is already under pressure because the economy is growing faster this year on pandemic recovery than the oil supply. EMERGENCY OIL STOCKS MAY BE RELEASED While the specific impact on world oil markets is yet to be determined, the International Energy Agency (IEA) recently said that its member countries stand ready to act collectively to ensure that global oil markets are adequately supplied. The agency said most immediately at risk are the roughly 250,000 barrels per day of Russian oil exports transiting Ukraine via the southern branch of the Druzhba pipeline to supply Hungary, Slovakia and the Czech Republic. It added that these countries have ample government-held emergency stocks to draw upon in case of need and added that the IEA will continue to monitor the market closely and assess the need for activating its emergency oil system. Meanwhile, SPI Asset Management managing partner Stephen Innes said the Ukrainian transit route for energy markets is the problem as there will be massive pipeline disruptions. "Not all Russian oil flows to Europe via Ukraine. However, Russia could still redirect some volume via seaports with spare capacity to ease the situation. So far, there has been no change in supply or demand. "What we see in the market is speculative fervour and a scramble for prompt barrels as inventories are tight. So far, energy has been effectively carved out of sanctions, and this has eased the tension and put a lid on oil prices," he told Bernama. Total oil stocks in IEA member countries amounted to close to 4.16 billion barrels as of end-December 2021, of which 1.5 billion barrels were held by governments as emergency reserves. IEA net-oil-importing countries have an obligation to hold emergency oil stocks equivalent to at least 90 days of their net oil imports. ASIA-PACIFIC'S DIRECT TRADE WITH RUSSIA While Russia has a large physical presence in Asia, Russia is not a major trading partner with the countries in the Asia-Pacific region, according to Moody’s Analytics. China is by far the largest exporter of goods to Russia, amounting to US$51 billion in 2020, according to the International Monetary Fund's Direction of Trade Statistics, made up largely of computers, electronics and machinery -- including mobile phones -- and vehicle parts. Second-ranked South Korea exported US$6.9 billion the same year, followed closely by Japan with US$5.8 billion. Moody's Analytics said exports to Russia are somewhat important for China, however, as it is also the largest importer within the Asia-Pacific of goods from Russia, with nearly 70 per cent of Russian imports comprising energy-related products, including crude oil, refined petroleum and coal briquettes. "Natural gas is a small import component, but this is expected to rise with the recent agreement between China and Russia to expand pipeline capacity between the two countries," it added. IMPACT OF SANCTIONS ON RUSSIA De Oliveira said the sanctions imposed on Russia so far have been modest. "Unless the countries that are aligned with Ukraine accept to share some of the costs of isolating a major energy producer like Russia can have, including higher gasoline prices, it might not change much the status quo," he added. The move to block certain Russian banks' access to the SWIFT international payment system is aimed at preventing Putin from using US$630 billion in central bank foreign currency reserves in the invasion of Ukraine and to defend a plunging rouble. Cutting Russian banks out of the SWIFT system -- the world's main international payments network -- would severely affect Russian trade and makes it harder for Russian companies to do business. Innes said the sanctions have yet to impact the oil and gas market as the West has carved out oil and gas from sanction. "But that is not to say they might not consider doing so at a later date, especially if shale oil production in the US gets government incentivised to pump more barrels as politically challenging as that would be," he added. -- BERNAMA