As Russian President Vladimir Putin moves closer to Ukraine, global energy markets face a potentially seismic event threatening a global economic downturn.
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With global oil supplies below normal and the International Energy Agency (IEA) admitting it has overestimated global supplies, the loss of Russian oil and gas could be virtually impossible to replace. In Europe, we have already seen natural gas prices reach record highs as the continent feels the impact of being too dependent on Russia for this product. On the oil side, Russia is currently the world’s second-largest producer, and if it chose to cut off supply or supply was interrupted due to an active war, there would be a huge vacuum in the global market.
THE STOCK MARKET IN BIDEN’S FIRST YEAR
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President Biden has said he expects Russia to enter Ukraine and suggested the country could make what is called a “minor incursion” that could result in less severe penalties. It seemed to invite Putin to cross certain lines and an open invitation to invade. The administration had to reconsider these comments. Ukraine also countered that there was no minor incursion. The president still warned Russia of “disaster” if it invaded Ukraine, and that word could spread to the global energy space.
THE ECONOMY IN BIDEN’S FIRST YEAR
Biden and some Western leaders assume that Russia is more than likely not to use oil and gas as a political weapon because the Russian economy is so dependent on oil and gas money. Yet Putin suggests he feels the West is closing in on him, so desperate times might call for desperate measures.
THE NORTHERN PIPELINE AGREEMENT 2 WILL HANDS RUSSIA PUTIN THE KEYS TO EUROPE
Most recently, the Biden administration attempted to prevent Congress from imposing further sanctions on Russia’s crown jewel pipeline, the Nord Stream 2, so that the president could use it as leverage, by adopting an approach of carrot and stick to try to stop him from invading Ukraine. . The Nordstrom 2 pipeline is that controversial gas pipeline that Germany wanted over objections from President Trump and Biden that carries gas from Russia to Germany. The pipeline not only leaves Germany but also other parts of Europe more dependent on Russia for gas supplies. Ukraine, for its part, knows very well the risk of getting gas from Russia, since Russia cut off its supply in 2006 and 2009.
Biden lifted sanctions on the pipeline to allow its completion as a gesture to Germany, which now likely regrets working with Russia. Russia has already played hardball this cold European winter, slowly shifting supplies onto existing pipelines, and some European politicians and others have accused Russia of withholding gas supplies from Europe to use its influence to accelerate the certification of Nord Stream 2. Senate Democrats blocked legislation by Republicans to sanction the pipeline.
Gas pipeline networks are a big issue in this dispute, as Ukraine is an important part of the gas pipeline network that helps distribute natural gas supplies throughout Europe. Russia is the gas producer, Ukraine is the carrier. Russia supplies more than 25% of the natural gas consumed in the European Union, and 80% of it passes through Ukrainian gas pipelines.
After Russia cut off supplies to Ukraine in 2009, it was reported that 18 European countries experienced significant drops or complete cuts in their supplies of gas transported through Ukraine from Russia.
This brings us back to oil. It’s not good when the world’s second largest oil producer which produced 10.1 million barrels of oil and condensate last month goes to war.
In years past, fear of war itself would have driven oil prices up in what has become a geopolitical risk premium. In recent years, this risk premium was lower due to the American shale revolution which gave the world a supply buffer. Yet the U.S. oil industry has been held back trying to stay profitable after a few bad years, especially post-COVID-19, and held back by the Biden administration which has created an unfriendly fossil fuel investment environment. Without this American buffer, the supply situation looks tight overall and, based on the latest news, tighter than a major global agency thought.
The International Energy Agency reported that global oil inventories fell by 600 million barrels last year, more than the 400 million expected.
Preliminary data for December shows OECD industry inventories fell another 45MB while oil on water volumes increased.
This means that global oil supply is much tighter than they thought and leaves us even more exposed to upward price shocks if a Russian war in Ukraine further disrupts oil supply.
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Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world’s leading market analysts, providing individual investors, professional traders and institutions with up-to-date information on investments and risk management in the global oil, gas and fuel markets. energy. His accurate and timely forecasts have become highly demanded by industry and media worldwide and his impressive career stretches back nearly three decades, garnering attention with his market appeals and energetic personality as the author of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at [email protected].