As a result of the Russian invasion of Ukraine, the price of natural resources has risen massively. There are likely to be several ramifications which in the long term may not be good for the oil and gas sector in the long term, suggests Kay Rieck, an experienced market observer and investor.
War is the worst-case scenario in every way. For the oil and gas sector, Russia’s incursion into the Ukraine will be viewed in the long term, I suspect, as absolute proof of this assertion.
If the circumstances were better, the numbers would be a cause for celebration in the industry. The price of Brent Crude is hovering at around US$100 per barrel, a hike of around 20% since the start of the year. West Texas Intermediate has shown a similar spike, and trading charts for natural gas looking like a tech bubble from the turn of the millennium.
Changing personal calculations
While the global economy had overall weathered the storm that was created by Covid-19, it was not in a great position prior to the Kremlin’s decision to invade Ukraine. The spectre of inflation was stalking several of the world’s major economies, and many people will have been looking at their personal finances and working out how they can tighten their belts.
And here is the first problem for the oil and gas sector. While significant supply chain component issues that have put price pressure on the cost of electric cars in recent months, they will be nothing compared to the change in the running cost of a traditional petrol vehicle over the next few months. And yes, the cost of charging an EV is also going to rise considerably, but the long and the short of it is that the equation that people will be doing as they try to work out the domestic ramifications of rising prices will be transformed by the rapidly rising cost of oil.
Changing economic pressures
The reminder that most countries rely on other countries for energies supply is likely to drive change, and pressure for change, significantly over the next few months. BP’s decision to offload its stake in Russian state-owned oil firm Rosneft might well have been on the cards for the last couple of years, but the way that it has been done certainly looks like a plaster being torn off rather than gradually removed. Norway’s Equinor is also in the process of divesting itself of its holding in Russian joint ventures.
For many of these firms, they are unlikely to return to these ventures in any meaningful way, it will simply accelerate their strategic moves to embrace alternative forms of energy. Other companies in other parts of the world may step in, but given the sanctions regimes that are being put in place, they may find this economically difficult and politically unpalatable in the short to medium term.
The break-up of OPEC+
The third issue for the oil and gas sector is that the Kremlin’s bellicose move could lead to the break-up of OPEC+.
The global oil sector has been divided into the 13 members of the Organization of the Petroleum Exporting Countries (OPEC) and a group of associated large oil producing countries that have tended to align their interests with OPEC. It’s a cartel system that has by and large managed both the stocks and prices of oil globally through closely guarding supply.
One of the most influential countries in the associated group is Russia. Given the economic sanctions that the Kremlin’s invasion has put Russia under, the country is likely to need to find ways to replenish itself on the global financial markets.
It is a vey complex situation, because even prior to the invasion, Russia was struggling to keep up with its production targets. As such, its influence within OPEC+ was starting to dimmish. While Russia’s move against the Ukraine is likely to have made calculations more complicated, it was thought that production targets were likely to be increased at the next OPEC+ meeting on March 2. This would have meant that gap between Russia’s commitments and its delivery would have become wider.
That said, geopolitics has changed significantly over the last decade, and Moscow’s influence with many OPEC+ members had increased significantly at the same time as Washington’s has waned, so any reduction in influence within OPEC+ should be seen through that lens. That said, Beijing now has a great deal more influence than it has ever had, and so there is a great deal of interest in China’s response to Russia’s invasion and this may have a significant influence on the future of OPEC+.
We watch the fighting in Ukraine with dismay and the cost in human lives and lost potential is undoubtedly going to be colossal. The ramifications for the oil and gas industry are irrelevant in that context, but they are likely to be significant nevertheless.