The economic fallout of Russia-Ukraine crisis continues to accumulate and has led to some wild swings in the market. Brent, at one point, touched $139 (settled down afterwards) highest since 2008. On the other hand natural gas prices are going through the roof as well and coal isn’t behind too. All of this is creating a flurry of problems across the globe from developed countries to developing ones. The swings in markets have become more intense as Russia has tried to warn the Western allies that banning their oil and gas sector will have catatrophic consequences for the global markets – and they aren’t wrong in saying that. Despite the warning, U.S. has went ahead and banned oil from Russia.
However, U.S. doing this isn’t as much concerning as the EU doing it. Why? Because U.S. only takes about 600,000 bpd of Russia’s oil and given the high prices and increase in production – highlighted by our FSC as well – this amount can easily be replaced by domestic oil. But this will not be the case if Europe tries to do it. The region is dependent on 40 percent of its gas imports on Russia. For some countries, such as Finland and Poland, the figures go higher than 50 percent. With rampant inflation and soaring energy prices precipitating into an Energy crisis that is still going on, Europe cannot afford to take such a drastic step as Scholz said few days back that Germany cannot make more sacrifices. Natural gas prices have touched record highs with €345 equivalent to $600 in oil!!!
In such circumstances, people have started to talk about what alternatives the EU might have should it go for a decision to ban oil and gas from Russia. United Kingdom, Netherlands, Denmark, and Norway are some of the alternatives but they cannot quench the demand of the region. Also, even though the LNG imports to Europe has hit a record high but the terminals receiving them have limited capacity. Electricity can be made by non-gas resources but will only amount to 152 TWh as compared to EU’s need of 3650 TWh as per Rystad Energy.
Qatar is another feasible option, however, they already have long term contracts to Asia and are only left with 10-15 percent of its production to Europe. Qatar has publicly accepted that no SINGLE country can replace Russian gas for Europe. Germany’s Scholz has said that they won’t make more sacrifices as the country is highly dependent on gas from the said country. I personally do not forsee any scenario where EU blocks oil and gas from Russia and escapes the economic, political and social chaos that would entail. Higher oil prices are already eating into customer’s pockets and tapering political capital of different administrations. Gasoline prices in the U.S. have touched $4 which is only 11 cents shy from touching 2008 levels.
If you are an investor, then I would personally propose to embrace a highly cautious approach.
