Prof. ST Hsieh
Director, US-China Energy Industry Forum
July 30, 2022
After the war in Ukraine broke out on February 24th this year, the west immediately implemented “unprecedented economic sanctions” against Russia. But the goal was not only to stop the war, rather it went very far to stop Putin or crater Russia. West political leaders correctly recognized that Russia’s economy depends on energy revenue, so they targeted Russian energy export to Europe. But these political leaders overlooked their own exposure: EU’s economy critically depend on Russian oil and gas. While US exports oil and LNG, however the overall US capacity is not possible to replace Russian oil and gas. In fact, it is impossible for the world to fully replacing Russian oil and gas for Europe. As such, EU political leaders now are rushing to develop an emergency energy plan which calls for an average of 15% natural gas reduction from this August to next March. Will it be enough? It will depend on God and Putin! If the coming winter is mild and if Putin is kind enough not to completely shut of natural gas supply to Europe, the plan will work without massive damages.
Of course, Europe can also help themselves by actively working on a cease fire in Ukraine!
The following JPMorgan’s analysis pointed out a major fallacy of EU’s sanction design against Russian oil. The US and EU wishfully thought their sanctions against Russian oil would effectively cut three million bbd Russian oil out of the “global market.” In order to stabilize the global crud oil prices, the US promised to release her SPR at the average rate of one million bbd from April to August this year. The global crude oil price did shoot up above US$100 bb!
This high oil price effectively penalizes EU as it still imports Russian oil every day at the premium. On the other hand, high oil price rewarded Russian because it sells less crude to Europe but rakes in the same income. It was reported that Russian was able to make US$ One Billion per month in the Spring this year.
In addition, Russia increased sale of discounted crudes to China and India. The discount did not hurt Russia much because of the elevated global crud oil price, after discount the price is still better than past years.
Finally, the insult is that India often served as a middleman or broker: importing discounted Russian oil and re-sell it to EU nations at a premium. So, in terms of crude oil, EU really shoots her own foot by sanctioning against Russian oil. In balance, the net result for EU is paying higher price but get less oil with all the sophisticated rules and enforcements. In terms of sanction natural gas, EU is even worse off than oil! EU is already in a natural gas emergency.
JPMorgan says Russia has had little problem rerouting its oil exports, meaning the expected plunge in production never happened
Harry Robertson Fri, July 29, 2022 at 4:44 AM
- Russia has been able to reroute its oil exports away from Europe with little fuss, JPMorgan has said.
- The bank’s analysts said they expect Russian production in the third quarter to be higher than a year ago.
- Better-than-expected global production and signs of a drop in demand have pushed oil prices lower.
Russia has been able to reroute its oil exports away from Europe without serious disruptions, JPMorgan has said, adding that the expected drop in output “never happened.”
Better-than-expected Russian production, along with the release of oil from global strategic reserves, helps explain the recent drop in crude prices, the bank’s head of commodities research Natasha Kaneva said in a note to clients.
Russia’s oil exports to Europe — its biggest market — have fallen relatively sharply in 2022, as companies have “self-sanctioned” in the wake of Vladimir Putin’s invasion of Ukraine in late February.
However, Russia has been able to shift its exports towards Asia, with India and China in particular stepping up their purchases. More recently, a jump in domestic demand has caused Russian oil production to rise back to prewar levels.
“The market consensus was too pessimistic about Russia’s capability to re-route volumes to other buyers,” Kaneva and her colleagues said in the note Wednesday. “Russia’s exports adjusted towards other buyers without a serious disruption to its production.”
“At its peak, the oil market was pricing in the worst-case scenario — a 3 million barrel a day loss of Russian production combined with record-high summer demand — while, in reality, it never happened.”
JPMorgan expects Russia production to produce 9.95 million barrels a day of oil in the third quarter, above the 9.76 million barrels a day produced in the same quarter a year earlier.
It thinks production will slip to 9.5 million barrels a day in 2023, staying relatively strong despite the European Union’s ban on most oil imports from the country.
Oil prices have fallen in recent weeks, with global supply stronger than expected and demand likely to weaken in the coming months as the world economy slows. WTI crude, the US benchmark price, was down around 10% over the last month to trade at $98 a barrel Friday.
Russia’s oil and gas revenues have helped Putin’s government prop up the local currency, the ruble, alleviating some of the pressure on the economy.
However, the economy is still expected to shrink sharply this year. Imports have cratered in a sign of domestic stress.
Yale academics, led by Jeffrey Sonnenfeld, said in a study this week that Western sanctions are “catastrophically crippling” the economy, with domestic production slowing dramatically.
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