While the world is watching the UN General Assembly discussions on Gaza-Israel, hybrid warfare in Europe (drones) and Trump, global oil markets are showing increased instability, as Ukrainian drones are destroying key oil and gas infrastructure inside of Russia. Over the last few weeks, a tsunami of reports has been published about a possible oil glut in the coming months or years, supported by OPEC-8 decisions to increase the export ceiling. However, reality in the market shows a different picture. Until now, no real crude oil price crash is showing; global prices are even very stable, while fundamentals in the markets are increasingly influenced by external geopolitical threats, not only Russian aggression towards NATO, or a heating up of the East Med (Turkey, Israel, Gaza Flotilla), but also increasingly Ukraine’s effective strikes on Russia’s infrastructure.
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Powered by Money.com – Yahoo may earn commission from the links above.Almost daily, reports are showcasing the strategic success of Ukraine’s campaign, which, in addition to its battlefield tactics, has effectively executed precision strikes and drone attacks on Russian oil refineries, fuel depots, and related logistics. These intentional strikes have targeted the Kremlin’s economic lifelines, leading some to assert that the most effective sanctions currently hitting Russia’s war chest or Putin’s lifeline are the Ukrainian drones.
While most energy analysts are still obsessed with OPEC, US shale, or Israel’s operations in Gaza, Russia, not only a pivotal player inside the so-called OPEC+ group, but also one of the world’s leading oil and gas exporters, is looking at a very dire situation. Ukrainian drones are not only degrading Moscow’s ability to turn Russian crude into exportable petroleum products (diesel, gasoline, kerosene) but also forcing Russian refineries to go offline. Both issues are hitting Putin’s war economy very hard, as they decrease options to monetize its hydrocarbon potential (exports) and also force higher domestic price settings for Russian citizens and external parties. Lately, in a move to squeeze Russia really, Ukraine has increased its attacks on Russian oil ports, in a move to hit export potential, while in the end forcing Russian crude oil production to be shut in.
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The current situation, combined with increased geopolitical risks and strong global demand, suggests a potential shift towards a bullish environment. Even OPEC+’s theoretical production and export increases may not be enough to mitigate this shift, or in some cases, may not be sufficient at all. This potential for a bullish market should prompt all market participants to adopt preparedness and strategic planning.
The latest reports from Russia indicate that Ukrainian drones have hit dozens of Russian fuel facilities, while at the same time, maritime drones and missiles are being used. The potential of Ukraine’s latest military addition, the Flamingo Missile, could be a watershed development. This missile can reach much further into Russian territory with a larger payload, potentially causing significant damage to key oil and gas infrastructure. Western and Russian outlets have also indicated that over a million barrels per day of refining throughput is being hit or removed from the market, as major refineries and pipeline centers are being shut down or taken offline. For global oil markets, Russia’s exports are significant, as it is a leading exporter of diesel, fuel oil, and kerosene. The potential impact of the Flamingo Missile, combined with the ongoing drone attacks, underscores the evolving nature of the geopolitical risks in the oil market.
While global markets are being hit increasingly, even if additional Russian crude is exported, the situation has become very dire. Independent reports from Russia indicate severe fuel shortages in several regions of the country, not only impacting the war economy sectors (manufacturing, defense) but also increasing the potential for internal unrest. Russian oligarchs have been complaining about the fuel and energy situation for weeks. While Russian refineries, which supply the domestic market, are affected, seaborne crude flows are increasing, as Moscow is forced to export more. Russia doesn’t hold vast crude oil storage facilities or volumes, leaving it with no option but to export crude. Some Asian markets will be happy, as most Russian seaborne volumes will head there. Still, regional markets for Russian products will be struggling to find additional supplies.
All in all, this could mean a short-term increase in supply to Asia. To what extent this will be possible, given that the US and EU are increasing pressure, is, however, a valid question, especially when considering India. If Russia doesn’t manage to export the increased volumes, domestic oil production may need to be shut in. When the market recognizes the increased geopolitical risks, a higher risk premium will result in higher oil prices. Downstream, prices will increase globally, as the current situation and today’s statement of renewed, stricter export bans on diesel or other products by Moscow will impact the market. Asian or Middle Eastern refineries will not be able to counter this.
Considering all these factors, the real net effect could be a decrease in global product availability in some consuming regions, even as seaborne crude volumes remain robust. This could then lead to a somewhat unexpected tightening of markets. OPEC+ export increases are unlikely to make a significant difference. Over the last few months, most OPEC-8 increases have been technical, aimed at legitimizing existing overproduction. The remaining spare production capacity of the group, or even OPEC+ as a whole, is shrinking. Current scenarios do not even include a new confrontation in the Middle East or the East Med, US actions against Venezuela, or a large-scale force majeure. In this context, the role of OPEC+ as a swing producer is limited, and the market should not rely solely on its actions to stabilize the situation.
By Cyril Widdershoven for Oilprice.com
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