Strategist says Russia-Ukraine war impacting already in-flux global energy market
Global demand for oil was exceeding production by 1 MMbpd before the Russia-Ukraine war, setting the stage for an oil market that could continue to see significant price changes. That’s the assessment of Jacob Shapiro, founder and chief strategist of Perch Perspectives, a business and political consulting firm.
Two main factors. While oil prices have surged to 14-year highs in the past week, Shapiro said there are two main factors that will determine their stability going forward. The first is potential revival of the Iran nuclear deal, which would give Iran sanctions relief in exchange for curbing uranium enrichment. “Iran needs to be able to sell its oil in global markets and attract much needed foreign investment after years of economic shocks due to sanctions,” said Shapiro. “If you believe Iran's oil minister, Iran can be at full pumping capacity within two months of a deal. Either way, this is keeping a ceiling on oil prices.”
The second factor is whether Europe and the U.S. will impose harsh sanctions on Russian energy exports, including whether Western financial sanctions will become crippling enough that Russia decides to limit exports, said Shapiro. He believes both of those scenarios are unlikely, since Europe would not commit “energy suicide” to save Ukraine.
Other issues. However, there are always other unlikely factors to consider that could send markets into a tizzy, like if one errant Russian missile hits a pipeline. “Any other disruptions—like, for example, a deterioration of the fragile peace in Libya—could also lead to further oil production drops,” said Shapiro. “Global oil production was already not meeting post-Covid-19 demand, pre-Russia-Ukraine war, so even small blips like this in other parts of the world could send oil prices higher.”
Shapiro said that while Europe could probably cut its Russian natural gas imports by a third this year, by importing LNG, using reserves and boosting European production, the continent is also unlikely to pursue any course that would lead to Russian natural gas being cut off. “The simple and unpleasant fact is that anything that affects energy imports from Russia will have extreme negative shocks on the European economy, to include energy rationing or a tripling of natural gas prices.”
But natural gas is not like oil, he said, and Russia does not have pipelines to China or alternative markets. This gives the consumer more leverage than the exporter, although of course, war is unpredictable. “All it takes is one errant artillery shell, or one miscalculation, to set off a chain of events that can lead to something as disastrous as an energy shortage in Europe during winter,” Shapiro said. Europe’s primary focus likely won’t be on natural gas pipelines from alternative sources, he explained. Germany has said it will build two new LNG terminals as quickly as it can, and there may be additional attempts to boost LNG import capacity.
Long-term, this situation will sharpen Europe’s focus on renewable energy, including solar, wind, nuclear and hydrogen, Shapiro said, and funding for these will be vasty accelerated. But for now, hydrocarbons account for the vast majority of global energy production.
Looking ahead. “Renewables are not even keeping up with energy demand growth yet, let alone eating into energy demand as it stands today. This was the macro environment before the Russia-Ukraine war,” said Shapiro. “If the war goes on longer than anticipated, or if I am wrong about the EU/U.S. appetite for tougher sanctions on Russia's energy exports, then the last week or two will be seen in hindsight, as just a prelude to an even sharper spike in prices. I don't think that is the most likely scenario—but I also don't dismiss it, which, in and of itself, should be worrying the market.”
