A Broad Update on Energy Markets

There is a lot happening in the Energy space this week, as politicians globally react to both the horrors in Bucha and their constituents’ ire over high gas prices. Is a full EU embargo of Russian energy in the offing? Will coordinated oil reserve releases ease the pain at the pump?

We will dive into both of these—from a pure market and economic standpoint. These are hot political topics, and oil and gas prices have become an increasingly partisan issue in the run-up to November’s midterms. But we favor no party nor any politician, and markets don’t have political preferences either. Their focus, like ours, is on policies, not personalities. So please take a moment to turn off your political biases. … Ready? Ok!

The EU Cracks Down?

The G-7 made another concerted effort to ratchet up sanctions on Russia this week, after Russian troops’ withdrawal from Bucha—a Kyiv suburb—revealed the atrocities that happened during their occupation. Unsurprisingly, pressure on the EU to stop buying energy from Russia intensified, and European Commission President Ursula von der Leyen said she will push for a full ban … on Russian coal imports, while debate on embargoing oil and gas continues. Some observers argue a full ban is now only a matter of time, lest allegations that the bloc is effectively funding war crimes stick.

We aren’t so sure that outcome is automatic. We have followed European politics through many, many leaders, and EU officials have demonstrated a remarkable aptitude for kicking the can. Banning Russian coal is mostly symbolic right now, as European energy firms haven’t bought much of it since the invasion, since banks were largely refusing to finance commodities trading with Russia.^[i] But the ban lets the EU have the appearance of doing something, which buys time to keep oil and gas flowing. Note, too, that the leader most loudly calling for an oil and gas ban—French President Emmanuel Macron—is staring down a re-election battle that just got a whole lot closer than he thought it would be. Urging a ban is probably an attempt at stealing challenger Marine Le Pen’s thunder ahead of this weekend’s first round vote and April 24’s likely runoff between the two. In our experience, such heated talk has a way of dying down after an election, yielding little to no fruit.

Either way, we don’t think this means as much for global energy prices as many presume. Some analysts project an EU ban on Russian oil would maroon millions of barrels per day of Russian supply. We have our doubts. Russia is still pumping flat-out, which tells you they have buyers. Indian refiners are gobbling up Russia’s Urals oil blend, which continues trading about $30 per barrel cheaper than Brent crude, the global benchmark.^[ii] Reuters estimates India has purchased at least 14 million barrels from Russia since the invasion began, compared with 16 million total barrels last year.^[iii] That. Is. A. HUGE. Increase. Self-interest is a strong motivator. India relies on imported energy, and it has a huge population and deep poverty in much of the country. Chinese refiners are buying too, likely for similar reasons.

After all, just six months ago, both nations were in the throes of an energy crisis that erupted from a natural gas shortage in Europe. That drove demand for alternate energy sources—chiefly oil and coal—sending those prices sky-high and making them scarce in both India and China. Indian plants nearly ran out of coal, and China rationed electricity for a spell. We suspect this is why India has also been buying heaps of Russian coal.

Markets seem to have already figured this out. While near-term European coal futures prices jumped after von der Leyen’s announcement, they remain almost $150 per ton below their March 8 peak.^[iv] It seems fear of supply disruptions was more acute than the disruptions themselves. Oil has charted a similar course, with Brent crude falling from $133.18 per barrel on March 8 to $106.56 at Tuesday’s close.^[v] Simply, with China, India and others buying more energy from Russia, it frees up supply from other sources for Europe and the West in general. For Europe, that means more coal from Australia and South Africa, oil from the Middle East and liquefied natural gas from the US. As supply lines and refineries continue readjusting, prices should continue stabilizing.

Friendly Reminder: Oil Reserve Releases Do Little

Politicians, however, don’t much mind market economics, and they are well aware of how frustrated voters are with high gasoline prices. So, we have yet another coordinated international release of strategic oil reserves in the offing. The US is going to unleash 1 million barrels per day over the next 6 months, and other members of the International Energy Agency will release another 60 million barrels total over that span—about 333,333 barrels per day on average.

Sound big? Well, the US Energy Information Administration expects the entire world to consume 100.6 million barrels per day on average.^[vi] The coordinated release will satisfy about 1.3% of that, which is not a lot.^[vii] Oh, and it won’t even all go to gasoline, as the manufacturing world is desperate for petrochemical feedstocks for synthetic rubber, plastics and a whole lot more building blocks of basic consumer goods. The two prior releases over the past six months barely moved the needle, and we doubt this does much either. We wish we had better news here, but being realistic in your expectations is key, in our view.