Geopolitical risks to watch this winter

A single attack on oil at this point could push prices up to $90, but that will depend on where it is. Markets will weigh more heavily on some geopolitical sentiments than others. And there’s plenty to choose from right now, from the escalation in Ukraine and Russia and the very quickly quashed uprising in Kazakhstan to the long-running Libyan conflict and the ever-present threat of Houthi missile attacks. on Aramco’s Saudi oil facilities.

What would push the oil price needle to $90 right now would likely be a clear Russian move on Ukraine (not just a threatening and ambiguous border deployment), or a serious attack on Saudi Aramco.

Libya: instability already integrated

In Libya, where the December 24 presidential elections have been postponed, markets reacted mildly to the shutdowns of the country’s largest oilfield in mid-December, despite the fact that the blockage was caused by a clash between factions powerful revealing a conflict that has never been resolved and could at any time return to a state of civil war. The latest proposal is to hold elections at the end of January but to start with parliamentary polls and conclude with presidential elections (the opposite of the initial plan). As maneuvers for control of Libya’s oil and revenue continue to escalate until elections are held, we expect further political breakdowns. Although these blackouts are changing the oil price needle, the impact will not be drastic as the market has already priced in the ongoing Libyan instability. Even another all-out civil war would not have the same impact as some of the other potential geopolitical upheavals on the horizon.

Ukraine-Russia: The NATO-Russia Border War

A full Russian invasion of Ukraine would provide a geopolitical risk premium even without oilfield closures or a direct impact on oil supply. But the probability of a full invasion at this stage is not high. More likely is Russian aggression just beyond the eastern territories where it already has a foothold (Donbass region), where it absolutely must retain control and provide a bulwark against any Ukrainian attempt to reassert itself there. Russian aggression could drive up oil prices simply because of uncertainty over the end game here, including NATO’s (read: Washington) response, which could theoretically lead to an East-West war much wider. We don’t think market sentiment is sophisticated enough to react to the potential for a war between Russia and NATO until it becomes a reality on the ground far beyond the aggression against Russia. ‘Ukraine. Another attempted Russian occupation of new territory in Ukraine could push oil prices higher, perhaps into the $90 range, although some of the uncertainty here is already priced in. (And the NATO-Russia war is not limited to this Eastern European battleground: this week, Russia threatened military deployment in Cuba and Venezuela if talks on NATO expansion eastward were not advancing, the goal being to bring things closer to the backyard of the United States.)

Kazakhstan: The brief high-impact riot

Protests over fuel prices in Kazakhstan, which turned into anti-government riots and were then suppressed with the help of Russian troops within days, ended up echoing on the oil market‘s radar. The market reacted with an uptick in oil prices in the face of uncertainty, which included protests that slightly disrupted Kazakhstan’s oil production. The country is extracting some 1.6 million bpd and the unrest reduced output by around 73,000 bpd for a few days, but was expected to return to normal by the end of the week. For the markets, this one came out of nowhere in a country that doesn’t usually see such events; and it turned violent very suddenly, impacting oil prices. Just because the Russians stepped in and put down the riots and restored order doesn’t mean it’s over. For investors, this stable oil, gas and uranium environment will be plagued by domestic political and geopolitical uncertainty for some time to come. It’s not just about protests over fuel prices; it is a battle between the long-ruling Nazarbayev clan and Nazarbayev’s puppet-turned-nemesis, Kazakhstan’s current president, Tokayev. And Russia has just joined Tokayev, which puts Nazarbayev’s billions at risk and he and his clan are not going to easily give up the power they have.

Saudi Aramco: When the Houthis Get Desperate

Nothing moves oil prices more than an attack on the world’s largest producer: Aramco in Saudi Arabia. In September 2019, a drone attack on Aramco’s processing facilities in Abqaiq and Khurais in the east of the country sent oil prices soaring by 15% in one day. The implications of an attack on Saudi oil are far greater than developments in the ongoing Libyan conflict, an occupation of Ukrainian territory, or rare high-level unrest in Kazakhstan (although uranium prices will react in a more spectacular than those of oil and gas). At that time, this allowed oil to break above $70. The same today would take it above $90. This would be the real driver of a major oil price increase, and there are real reasons to be concerned. Not only have Iran-backed Houthi rebels in Yemen recently stepped up cross-border attacks, the Saudis are asking their Gulf allies to bring in more Patriot missiles for defence. For 2022, this is the highest geopolitical risk premium for oil.