A Broad Update on Energy Markets

There is a lot happening in the Energy space this week, as politicians globally react to both the horrors in Bucha and their constituents’ ire over high petrol prices.^[i] Is a full EU embargo of Russian energy in the offing? Will international governments’ coordinated oil reserve releases ease the pain at the pump?

We will dive into both of these—from a pure market and economic standpoint. We are seeing oil and petrol prices become an increasingly hot political topic globally. But we favour no party nor any politician, and we don’t think markets have political preferences either. We think their focus, like ours, is on policies, not personalities. So please take a moment to turn off your political biases. … Ready? Ok!

The EU Cracks Down?

The so-called Group of Seven nations—Canada, France, Germany, Italy, Japan, the UK and the US—made another concerted effort to increase sanctions on Russia this week, after Russian troops’ withdrawal from Bucha, a Kyiv suburb, revealed atrocities that happened during their occupation.^[ii] Unsurprisingly, political pressure on the EU to stop buying energy from Russia intensified, and European Commission President Ursula von der Leyen said she will push for a full ban … on Russian coal imports, whilst debate on embargoing oil and natural gas continues.^[iii] Some financial observers we follow argue a full ban is now only a matter of time, lest allegations that the bloc is effectively funding war crimes stick.

We aren’t so sure that outcome is automatic. We have followed European politics through many, many leaders, and in our experience, EU officials have often demonstrated a remarkable aptitude for kicking the can. Banning Russian coal appears mostly symbolic right now, as European energy firms haven’t bought much of it since the invasion, since banks were largely refusing to finance commodities trading with Russia.^[iv] But we think the ban lets the EU have the appearance of doing something, which buys time to keep oil and natural gas flowing. Note, too, that one of the leaders most calling for an oil and gas ban—French President Emmanuel Macron—is staring down a re-election battle that just got a whole lot closer than he probably thought it would be based on polling a few weeks ago.^[v] In our view, urging a ban is probably an attempt at stealing challenger Marine Le Pen’s thunder ahead of this weekend’s first round vote and 24 April’s likely runoff between the two. In our experience, such heated talk usually has a way of dying down after an election, often yielding little to no fruit.

Either way, we don’t think this means as much for global energy prices as many financial publications we read presume. Some financial analysts we follow project an EU ban on Russian oil would maroon millions of barrels per day of Russian supply. We aren’t so certain. Russia is still pumping at high capacity, which, in our view, tells you they have buyers.^[vi] Indian refiners are gobbling up Russia’s Urals oil blend, which continues trading about $30 (£22.92) per barrel cheaper than Brent crude, the global benchmark.^[vii] Reuters estimates India has purchased at least 14 million barrels from Russia since the invasion began, compared with 16 million total barrels last year.^[viii] That. Is. A. HUGE. Increase. As a general rule, self-interest is a strong motivator. India relies on imported energy, and it has a huge population and deep poverty in much of the country.^[ix] Chinese refiners are buying too, likely for similar reasons.^[x]

After all, just six months ago, both nations were in the throes of an energy crisis that erupted from a natural gas shortage in Europe.^[xi] That drove demand for alternate energy sources—chiefly oil and coal—sending those prices sky-high and making them scarce in both India and China.^[xii] Indian plants nearly ran out of coal, and China rationed electricity for a spell.^[xiii] We suspect this is why India has also been buying heaps of Russian coal.

In our view, markets seem to have already figured this out. Whilst near-term European coal futures prices jumped after von der Leyen’s announcement, they remain almost $150 per tonne below their 8 March peak.^[xiv] It seems, in our view, warnings of supply disruptions from commentators we follow were more acute than the disruptions themselves. Oil has charted a similar course, with Brent crude falling from $133.18 per barrel on 8 March to $101.85 at Wednesday’s close.^[xv] Simply, with China, India and others buying more energy from Russia, it theoretically frees up supply from other sources for Europe and the West in general. For Europe, that likely means more coal from Australia and South Africa, oil from the Middle East and liquefied natural gas from the US. As supply lines and refineries continue readjusting, we think prices are likely to continue stabilising.

Friendly Reminder: In Our Experience, Oil Reserve Releases Do Little

In our view, politicians, however, don’t seem to mind market economics much, and they seem to be well aware of how frustrated voters are with high petrol prices. So, we have yet another coordinated international release of strategic oil reserves in the offing. The US is going to unleash 1 million barrels per day over the next 6 months, and other members of the International Energy Agency will release another 60 million barrels total over that span—about 333,333 barrels per day on average.^[xvi]

Sound big? Well, the US Energy Information Administration predicts the entire world will consume 100.6 million barrels per day on average this year.^[xvii] The coordinated release will satisfy about 1.3% of that, which is not a lot.^[xviii] Oh, and it won’t even all go to petrol, as the manufacturing world is desperate for petrochemical feedstocks (partially refined oil) for synthetic rubber, plastics and a whole lot more building blocks of basic consumer goods.^[xix] The two prior releases over the past six months barely moved the needle, and we don’t think this does much either.^[xx] We wish we had better news here, but being realistic is key, in our view.