As Russian President Vladimir Putin approaches Ukraine, world energy markets face a potentially seismic event that threatens a global economic recession.
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With world oil stocks below normal and the International Energy Agency (IEA) reportedly admitting that it has overstated world stocks, the loss of Russian oil and gas could be nearly impossible to replace. In Europe, we have already seen natural gas prices soar to record highs as the continent feels the effects of over-reliance on Russia for the product. On the petroleum side, Russia is currently the second largest producer in the world and if it decides to cut off supplies, or if supplies were cut off due to an active war, the gap in the world market would be massive.
THE STOCK MARKET IN BIDEN’S FIRST YEAR
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President Biden said he expected Russia to invade Ukraine and suggested the country could undertake a so-called “minor invasion,” which could entail less stringent sanctions. That seemed to invite Putin to cross some lines and an open invitation to invade. The administration had to withdraw these comments. Ukraine also snapped back that there was no such thing as a minor invasion. The president still warned Russia of a “disaster” if it invades Ukraine, and that word could extend to the global energy space.
THE ECONOMY DURING BIDEN’S FIRST YEAR
Biden and some Western leaders believe that Russia is unlikely to use oil and gas as a political weapon because the Russian economy is so dependent on oil and gas funds. However, Putin hints that he feels the West is closing in on him, so desperate times may call for desperate action.
NORD 2 PIPELINE DEAL HANDS RUSSIA’S PUTIN KEY TO EUROPE
Most recently, the Biden administration tried to block Congress from imposing new sanctions on Russia’s crown jewel Nord Stream 2 pipeline, so the president could use it as leverage and use carrots and sticks to try and stop him from invading Ukraine. The Nordstrom-2 pipeline is the controversial pipeline that Germany wanted despite objections from President Trump and Biden, and that transports gas from Russia to Germany. The pipeline leaves not only Germany, but also other parts of Europe that are more dependent on Russia for gas supplies. For its part, Ukraine is well aware of the risk of sourcing gas from Russia, as Russia stopped supplying it in 2006 and 2009.
Biden lifted sanctions on the pipeline to allow its completion as a gesture to Germany, which now likely regrets working with Russia. Russia has already been playing hard this cold European winter, slowly channeling supplies through existing pipelines, and some European politicians and others have accused Russia of holding back gas supplies to Europe in order to use its influence to speed up Nord Stream 2 certification. Senate Democrats are blocking legislation by Republicans to sanction the pipeline.
Pipeline networks play a big part in this dispute, as Ukraine is an important part of the pipeline network that helps spread natural gas supplies across Europe. Russia is the gas producer, Ukraine the transporter. Russia supplies over 25% of the natural gas consumed in the European Union, and 80% of this is routed through Ukrainian pipelines.
After Russia halted supplies to Ukraine in 2009, it was reported that 18 European countries experienced significant drops or complete disruptions in their gas supplies transiting Ukraine from Russia.
Which brings us back to oil. It’s no good when the world’s second largest oil producer, which produced 10.1 million barrels of oil and condensate last month, goes to war.
In recent years, fears of war have, in and of themselves, fueled oil prices in what has become known as the geopolitical risk premium. In recent years, that risk premium has been lower due to the US shale revolution giving the world a supply buffer. Yet the US oil industry has been held back trying to remain profitable after a couple of bad years, particularly post-COVID-19, and held back by the Biden administration, which had created an unfriendly fossil fuel investment environment. Without that US buffer, global supply conditions look tight, and based on recent news, tighter than a major world agency thought.
The International Energy Agency reported that global oil supplies fell by a staggering 600 million barrels last year, more than the 400 million expected.
Preliminary data for December shows that OECD industrial stocks fell another 45MB, while oil volumes rose on the water.
That means global oil supplies are much tighter than they thought, and increases the risk of upward price shocks if a Russian war in Ukraine disrupts further oil supplies.
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Phil Flynn is a Senior Energy Analyst at The PRICE Futures Group and a contributor to Fox Business Network. He is one of the world’s leading market analysts, providing retail investors, professional traders and institutions with up-to-date investment and risk management insights into the global oil, gas and energy markets. His accurate and timely forecasts are in high demand by industry and media worldwide and his impressive career spans almost three decades, attracting attention with his market calls and energetic personality as an energy report writer. You can contact Phil by phone at (888) 264-5665 or email at [email protected].