Russia’s invasion of Ukraine triggered severe economic sanctions, particularly in its financial sector. Last week, Western leaders slapped a series of new penalties on Russia, including the exclusion of Russia’s largest financial institutions from global financial systems; impose an asset freeze on all major Russian banks, cancel all export permits with Russia, and prohibit all major Russian companies from raising funds on their territory, among other measures.
The leaders, however, refrained from sanctioning Russia’s pivotal energy sector, presumably because it would throw an already strained global energy market into further disarray. But you wouldn’t tell by looking at the oil markets right now.
Oil prices and energy stocks are trading at multi-year highs after international refiners adopted a self-imposed embargo, with many reluctant to buy Russian oil and banks refusing to finance shipments of Russian raw materials. Refiners and banks are unwilling to do business with Russia due to the risk of falling under complex restrictions in different jurisdictions. Market participants also fear that measures directly targeting oil exports will soon be rolled out as fighting in Ukraine escalates.
“It will make trade with Russia very complex. These sanctions against Russia will have an incredible effect on global trade and trade finance,” he added. Sarah Hunt, a partner at law firm HFW who works with commodity traders, told the Wall Street Journal.
Things are getting dire for Russia’s oil sector, with oil exports falling sharply despite massive discount sales. According to Energy Intelligence, Russian oil export flows have fallen by at least a third – or some 2.5 million barrels a day – despite a discount of $11 a barrel over the dated Brent offered for troubled cargoes from the Russian Urals.
Russia normally exports 4.7 million bpd of crude and 2.8 million bpd of products, according to government data. But Energy Intelligence now estimates that around 1.5 million bpd of crude and 1 million bpd of refined products are not making it to market.
Besides the sanctions, European refiners are also reluctant to buy Russian oil due to its high sulfur content. Refiners prefer lighter grades because they require less processing with expensive natural gas, which allows for higher margins.
Upcoming Russian Energy Sanctions
Things could get even tougher for global oil and gas markets with reports of bipartisan calls for a ban on imports of Russian oil and gas to the United States A bipartisan push for the United States to stop importing oil from Russia is gaining momentum with the introduction of two bills. Democrats and Republicans agree that the United States should stop importing Russian oil, with Republicans pushing for more US drilling, while Democrats are advocating for a clean energy shift.
Ed Moya of Oanda told CNBC that “Brent could climb to $120 if the oil market begins to think that it is likely that sanctions will be imposed on Russian energyin response to Russia’s invasion of Ukraine.
Energy Aspects’ chief oil analyst Amrita Sen was even more aggressive with her prediction, telling CNBC that “We will go to $150 even more than that because the only solver currently in this market is demand destruction,” She estimated that about 70% of Russian crude oil exports “cannot be touched” for now because of bank sanctions.
The United States imports a significant amount of Russian oil but does not rely heavily on the country for supplies.
According to data from American Fuel and Petrochemical Manufacturers (AFPM), the United States imported an average of 209,000 barrels per day (bpd) of crude oil and 500,000 bpd of other petroleum products from Russia in 2021. This equates to just 3% of oil American crude. imports and 1% of total crude oil processed by US refineries. In contrast, the United States imported 61% of its crude oil from Canada, 10% from Mexico and 6% from Saudi Arabia in the same year. US imports of Russian crude oil have increased since 2019 after the country imposed sanctions on the Venezuelan oil industry. U.S. refiners also temporarily increased Russian imports last year after Hurricane Ida disrupted oil production in the Gulf of Mexico.
According to Adam Pankratz, a professor at the Sauder School of Business at the University of British Columbia, a complete ban on imports of Russian oil and gas would not disrupt the country’s supply so much, but would hurt in other ways.
“If the United States stopped importing Russian oil, that would mean that many other countries would probably not import Russian oil anymore, and that would already make a very tight oil market, and that would drive up the price of oil and that in turn can boost inflation, which in turn can affect the US economy,Pankratz told Al Jazeera.
The latest economic data revealed that the United States inflation hit a four-decade high of 7.5%, prompting Federal Reserve Bank of St. Louis President James Bullard to argue for an outsized rate hike. The Ukraine crisis could also derail forecasts by Fed Chairman Jerome Powell and other policymakers that inflation could start to subside naturally as federal stimulus and congressional assistance. to the economy will fade and supply chain bottlenecks will be reduced.
Currently, rising energy costs pose the greatest risk of pushing US inflation even higher from its four-decade high, which is bad for the US economy as consumer confidence slips. A survey by the University of Michigan showed that consumer confidence fell 8.2% from January to February, with fewer consumers planning to buy homes, cars or go on vacation in the next six months due to worries about the short-term economic outlook.
Indeed, some fear that the US economy could even slide into a recession.
Diane Swonk, chief economist at Grant Thornton, estimates that the US economy can withstand six months of oil prices of around $100 on average, although that could make the inflation problem worse, but a prolonged period of oil at $125 a barrel would almost certainly stall growth and lead to higher unemployment.
By Alex Kimani for Oilprice.com
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