The energy chess game between Russia and the West sees two presidents confront each other, taking very bold bets: Vladimir Putin wants Europe to pay Russian gas in rubles, while Joe Biden hopes to feed the oil market with strategic reserves so as to stop the increase in the prices of crude oil and gasoline. It will be interesting to see how far they go.
In Putin’s case, his “pay in rubles or no gas” threat comes after the winter peak in heating demand ends, raising questions about how desperate European buyers may be to meet the demand. With the advance of spring and the approaching summer, Moscow’s threats may no longer be very scary. At least for now. Gas is a major source of foreign exchange for the Kremlin.
The ‘game’ of gas
In the first nine months of 2021, the latest data available from Russian gas giant Gazprom shows that sales revenues in Europe, Turkey and China were 2.5 trillion rubles ($ 31 billion) from exports of 176 billion. of cubic meters of gas between January and September.
If the European Union refuses to ‘play’ with Putin – and there are already enough protests to show they won’t – the stalemate could drag on until the first colds return in the autumn, when Europe will somehow be. forced to consider an agreement or compromise with the Kremlin. It could be in November. And if Putin were to put his foot down, it could mean that Europe would not buy gas from Moscow for the next seven months.
In this time Russia could be forced to pump its gas into domestic storage sites that can hold around 72 billion cubic meters. Gazprom-owned storage sites in Europe could hold another 9 billion. The Russian gas giant expects domestic demand to increase to 260 billion cubic meters of gas by 2026 from 238 billion cubic meters in 2020 and plans to expand storage.
According to analysts, if European gas were redirected in the short term to existing storage, it would be full in three to four months and some of the gas production could then be shut down, hurting long-term growth. “For Russia, the decision to limit supply would be like shooting itself in the foot“Seb Research analysts bluntly noted. In addition, the EU has regulations covering measures to prevent and respond to disruption of gas supplies, Reuters reports.
The regulation identifies three levels of crisis: ‘early warning’, ‘alert’ and ’emergency’. EU countries must have plans in place on how to manage the impact of a supply disruption at the three crisis levels. In an emergency, European governments can only intervene if market measures are not sufficient to guarantee supplies to families and customers who provide essential services.
The European scenarios
Each country’s plan should define responsibilities for entities, including industrial gas consumers at each crisis level, list actions to make gas available in an emergency, and a plan for how countries will cooperate. In addition, the regulation requires member states to support another EU country that its gas infrastructure connects to if that country requests assistance to provide gas to households and essential social services.
In addition to trying to achieve more in an already tense global gas market, several European countries they also stated that they are ready to use more coal, potentially ‘extend’ the life of nuclear power plants and increase the production of renewable energy.
Many, however, doubt that the gas price stalemate will last for seven months as European businesses and households cannot afford to let prices soar further. The spot gas market in the EU has already increased by 500% compared to a year ago. Russia supplied 155 billion cubic meters of gas to Europe last year, or a third of the block’s supply.
US LNG exporters have already emerged as big winners of the European supply crisis, while Norway has also benefited. Last week, the United States said it will work this year to supply 15 billion cubic meters of LNG to the European Union, but this will not completely replace what Russia sends to Europe via pipelines.
Gas in European storage it could be enough for spring and summer without a reduction in demand, but Europe will risk entering next winter with only about 10% of the gas in stock by the end of October without some energy-saving measures, said Kateryna Filippenko, Wood analyst. Mackenzie.
To attract more LNG from other parts, i Wholesale gas prices in Europe are expected to remain higher than the Asian reference price. Skyrocketing gas prices are already hurting consumers and industries, and governments have spent billions of euros on measures to try to protect them. “We must be aware that companies that have signed long-term contracts with Gazprom receive gas at significantly lower prices than we have to pay in the LNG market. So there will be an impact on energy prices,” some warned already. week ago the European Commissioner for Energy, Kadri Simson.
The ruble
Finally, the ruble, which was in free fall in the first two weeks of the Ukrainian invasion, regained ground, not so much because of the optimism of operators about the Russian economy but more because of the extraordinary efforts of the central bank in Moscow to support it. Measures taken for this include banning commercial banks from selling dollars to customersa ban on Russian brokerage firms from allowing foreign clients to sell securities and a limitation on the number of dollars that Russians can withdraw from their bank accounts.
In addition to the efforts of its central bank, Moscow is also steadily gaining from oil and gas exports. One reason, of course, is that the sanctions themselves were not designed to harm Russia’s energy sales, as Europe depends on them. Those who are not taking Russian oil and gas now do so of their own accord, either out of sympathy with Ukraine or out of fear of political repercussions. India is an exception.
The US and the EU know that the only way to deprive Russia of cash to finance its war against Ukraine is to fine-tune existing sanctions against Moscow and devise more effective new ones. In principle, the White House and its allies must prevent Russia from purchasing the military equipment it needs to continue the warUS Deputy Treasury Secretary Wally Adeyemo said.
Overseas, Biden has also found support among Republican rivals to increase sanctions against Russia. But the president has been skeptical of embracing that support, wondering if it’s a ploy to make it slip ahead of November’s midterm elections.
Oil
On the oil front, Biden announced Thursday that his administration will release 1 million barrels a day of oil from the US Strategic Petroleum Reserve over the next six months to alleviate a global supply crisis. The president’s biggest problem may still be OPEC +, the Saudi-controlled cartel of producers and allies headed by Russia. The Alliance has no intention of adequately supplying the oil marketwhere every barrel requested becomes available and in any case, even if it wanted it, it could not fill the huge hole of 3 million barrels a day blown by Western sanctions on Russia.
Analysts across the energy sector warn of a worsening of the supply crisis in the coming months, as the United States confirms a stop to Russian oil, while many other nations avoid any kind of deal with Moscow, due to the sanctions.
Despite everything, OPEC + decided on Thursday to make only a modest increase in production of 432,000 barrels per day from May onwards. This is a slight increase from the usual monthly increase of 400,000 barrels per day in a market that analysts say would need about 5 million more barrels.
OPEC + also said that the recent volatility in oil prices “was not caused by fundamentals, but by ongoing geopolitical developments”, in an apparent reference to the war in Ukraine. Brent crude reached a 14-year high of nearly $ 140 a barrel in the aftermath of the sanctions imposed on Russia and has largely held above $ 100 in the last month.
Amos Hochstein, special envoy for international energy affairs in the Biden administration, said that the release of 180 million barrels from the US strategic reserve was just the beginning of a greater supply that will arrive shortly. But energy market analysts appeared skeptical of the plan’s success.
“The instinctive selloff of the announcement of the release of 1 million barrels a day from national reserves over the next six months will not have a lasting impact on oil prices, so if geopolitical risks continue to intensify, crude oil will recover most of the time. losses this week, ”said Ed Moya, analyst of the online trading platform Oanda.
Biden ordered the release of 50 million barrels from the Strategic Petroleum Reserve (Spr) in November and 30 million in March, in coordination with the release of reserves from other countries such as China, Japan, India, South Korea and Great Britain. The SPR had 568.3 million barrels in stock as of the week ending March 25, according to the US Energy Information Administration. With 180 million barrels drawn in six months, the reserve could drop to a third of its current size.
Biden began leveraging the SPR last year to supply US refineries with loaned oil from the reserve that they would not have to pay but return at a slight premium and within a set period. In this way, the administration hoped that there would be fewer oil transactions in the open market and that the prices of both crude oil and gasoline and diesel would fall. In recent weeks, the administration has released approximately 3.0 million barrels weekly from the SPR.
But government efforts so far have had a negligible effect on prices, with refineries producing more products than usual at this time of year. This resulted in an extraordinarily high barrel turnover that kept prices little changed on both the crude oil and petroleum products fronts. To conclude, two of the most powerful men in the world, by virtue of their office and the enormous resources they have at their disposal, they are determined to bend the market in their own way. It will be history showing the success – or not – of their actions.