Oil – 4 potential Russia-Ukraine scenarios & energy market impacts

  • A simple guide to the Ukraine-Russia crisis: 5 things to know | Ukraine- Russia crisis News | Al JazeeraWe expect the situation in the energy markets to remain unchanged. Nevertheless, in this scenario, natural gas prices stay elevated for a longer period of time as the markets continue to be tight, at least until the spring of 2023. In the event of a harsh winter, either in Europe or in Asia or both, pressure would increase on the LNG markets. However, these extra price gains will probably disappear as soon as the cold period is over.

2 is a de-escalation that leads to the normalisation of markets, assessed at a 15% likelihood

  • Energy markets would start to normalise. There will be enough gas supply available for consumers in Europe in the course of 2022. Natural gas prices would normalize towards the pre-2021 levels of the low EUR 20s/MWh or even lower as soon as the ongoing tight market conditions for this winter are over.

3 is a heightening of strains with Russia stopping gas exports to Europe, a 5-10% likelihood

  • With no short-term alternatives to fully replace Russian gas exports towards Europe, energy supply would need to be rationed, in particular for industry. In addition, prices of natural gas would jump significantly higher, and reach new record highs for a large part of the forward curve. The TTF monthly contracts could trade above EUR 200/MWh for an extended period, with peak prices significantly higher. As an indirect effect, prices of electricity would jump higher throughout the whole of Europe.

And 4 is a bigger escalation, which would also affect oil markets. Assessed at a <5% likelihood

  • Russia would decide to halt oil exports towards Europe. Such a shift in the oil markets would lead to higher oil prices. Oil prices would be trading above $100/bbl and in case of serious supply worries even head for a new test of the all-time high ($149/bbl). Due to tighter market conditions, this situation could hold for the rest of the year.

Iran foreign min opens the door to direct talks with the US

Iran foreign minister Amirabdollahian said Tehran might consider direct talks with the US if it leads to a good outcome.

Signals from Iran nuclear talks have been so murky but I take this is concrete good news. Iran today refused to put prisoners into the negotiation but that’s what leaders always say publicly.

For the White House, high oil prices are a major problem and the easiest barrels to get online in the world are in Iran. That’s a win-win and this is an interesting overture.

Here’s a look at oil, which is off the lows today:


OPEC says Omicron, rising rates will not subdue oil demand

  • OPEC expects the oil market to continue to be well supported this year, citing robust demand
  • said once again that the impact of the omicron variant is projected to be mild and short-lived (on oil demand, not your health 😉 )
  • The report pointed to tight supply, an example being the difficulties members of the group are having in boosting output (members added just 166kb/d of oil in December, falling g well under the target of 250kb/d)
  • The report noted the rising risk of further supply disruptions (rising geopolitical strains)

OPEC’s report showed global oil demand in 2022 is expected to rise by 4.15 million barrels per day (bpd) (same as in the previous report) and that use of oil will be greater than 100 million bpd in Q3 (also the same as said in the previous report).

The next OPEC and non-OPEC Ministerial Meeting is on 2 February 2022.


Vitol says oil prices could head even higher – tight supply

Via Bloomberg (may be gated) :

  • prices could go up higher
  • supplied are tight

Cited gas:

  • What’s happening with gas “serves to remind us that people will abstain from buying expensive energy at some point,” he said on a webinar hosted by Dubai-based consultancy Gulf Intelligence. “The question is at what point that affects the oil market.”

Also, on China (this via Platts (may be gated) ):

  • “It doesn’t look like China is going to shrink its [oil] demand,” Mike Muller told an online conference organized by Dubai-based Gulf Intelligence. “The fabric of society is still heavily oriented towards manufacturing and energy-consuming businesses,”
  • “Yes there have been some very high profile cases of people moving around China transmitting omicron from one place to another….but we are nowhere near seeing a major demand hit,”
In the wake of the SPR release, from the US and some Asian countries
  • Bloomberg with the report that the world’s two biggest commodities indexes — the S&P GSCI Index and the Bloomberg Commodities Index — are due to ‘reset’, which will trigger selling of futures contracts.

Here is the link to the piece from Bloomberg, main point being:

S&P GSCI Index and the Bloomberg Commodities Index reset

  • For WTI, that means investments tracking both benchmarks could be ready to pull almost 60 million barrels worth of futures contracts from the market, according to Societe Generale estimates.
  • The dollar value of those flows is significant — the French bank estimated in November it would be the equivalent of about $4.6 billion. Citigroup Inc. expects about $3.1 billion of selling, according to a December report.

Something to keep top of mind is that these flows are widely known and it would be bizarre if some, if not all, has been hedged into prices already. the Citi note, for example, was published in December.

Still, a heads up.

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