A summary of the impacts of the Russian invasion of Ukraine on energy markets

Brent crude has traded at prices in excess of $130/barrel in recent sessions, European gas close to £5/therm, both a far cry from prices even a year ago when gas cost less than a tenth of that.

Energy markets are clearly pricing in a good level of risk of interruption to Russian energy supplies, and some is already taking place. Russian oil production is typically around 11m barrels/day (global supply/demand is just short of 100m barrels/d). Exports are around 5m barrels/day, and reports suggest that perhaps as much as half of this has not been loaded in recent days; it has been made available, but traders are reluctant to buy it. (Russian steel producers have also reported difficulties in selling products).

So far, no threat has been made by Russia to use Europe’s energy dependency as a weapon, and there is no history of Russia doing this in the past. However, the threat to physical infrastructure and possible sanctions on future purchases of Russian energy both remain. Sanctions on payment systems, although intended to allow energy flows to continue have not removed the fear that a cargo once loaded, may be subject to new sanctions before it is delivered. Indeed, port operators at the UK’s Isle of Grain regasification facility refused to unload two ships carrying Russian Liquefied Natural Gas (LNG) in recent days. The US administration is examining the possibility of banning Russian crude oil imports; Canada has already announced that it would not buy Russian crude.

On the plus side, the possibility of a nuclear deal in Iran could see its oil production return to the world market, and the US’s International Energy Agency has already announced it will coordinate the release of 60m barrels of oil from strategic storage, possibly with more steps to come.

As for natural gas, again Gazprom is fulfilling all its customers nominations at the moment. Longer term, the Nordstream 2 pipeline, which could have bypassed Ukraine’s role in transiting Russian gas to Europe, appears to have been postponed indefinitely, and all employees have been laid off. In other actions that will affect supplies longer term, western energy companies are pulling out of Russia. This will limit access to skills and expertise as well as capital. Russia has been described as “uninvestable”, and this could have a detrimental effect on longer term supply growth. It is likely that in future, Europe will become more reliant on LNG imports from the US and elsewhere. It will have to compete even more with Asian buyers.

Globally, investment in energy projects has been lower in the past couple of years, as capital expenditure programmes have been cut in the face of COVID-19. This has left the global energy market poorly placed to respond to the supply issues, both real and possible, brought about by hostilities in Ukraine. OPEC has stated that it will only maintain its programme of modest increases to oil supply.

It goes without saying that all this is supportive of prices, in the short and medium term. It is much harder to say how high energy prices will go, and for how long. There will be knock-on effects to energy costs directly including gas, electricity, diesel, and also to the price of fertiliser. However, there is already some evidence of demand destruction in Asian LNG markets. European CO2 emissions prices have already fallen on the expectation of reduced industrial activity, outweighing the prospect of further increased coal use in electricity production.

Businesses everywhere will have to adapt to higher prices, passing them on where possible, but also cutting energy use where possible too. Those in agriculture are no exception.

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