2022 Theme: Oil and Energy Higher (Again)
In truth, we originally planned on taking a break from energy and oil this week. It has been a relatively fossil fuel heavy few months and there are plenty of other very interesting stories out there.
But then the price of oil went "parabolic." This is a term that is used to describe when an asset no longer creeps around but instead takes off like a rocket ship on its parabola
Here is the price chart:
Oil was up over 17% in the first three days of the week. The price per barrel rapidly went past $100 and then $115. Most crude benchmarks finished up over 15% for the week.
Gasoline has reached a national average of $3.92 a gallon in the US. In California it is well over $5 per gallon. Many other countries are $8 or even higher. At these levels, these prices will begin to hurt economic demand across the board.
Aside from the economic cycle angle, two big themes emerged from this move:
Despite the lack of direct sanctions there were suddenly very few buyers of Russian crude. Even at steep discounts there were few bids.
As we suggested last week, Europe still bought a lot of natural gas. They had little choice.
The first point is pretty incredible in the true sense of that word. We have not spent decades trading in oil markets but it is hard to think of a time where the entire world boycotted a country's production without being explicitly forbid from doing so.
Oil traders - not exactly a group with great reputations for probity! - are "self sanctioning" themselves rather touch Russian crude.
The commodity has become literally untouchable for many investors. And when someone like Shell's trading arm does step in, they are immediately condemned for doing so.
This is unusual!
Here is the chart of the difference between the main European oil benchmark (Brent from the North Sea) and the Russian Urals benchmark at the end of the week:
Boom!
A record discount for Russian Urals oil. This is quite a achievement for something that isn't mandated by law.
On the second point, the numbers are pretty striking. As with last week, the amount of natural gas flowing to europe continues to rise.
The "physical flow" from Russia to Europe has actually reached a high over the last 2.5 months with more gas being bought on March 1 and 2 than any single day since December 17 of 2020.
Aside from the awful irony of European consumers being more dependent on Russian gas after the invasion there is also a key distinction here:
The shunning of Russian fossil fuels and assets is largely happening in the financial sector. The physical buyers are still very much present, for now.
This is true for other sectors of the economy as well.
Framing it slightly differently, despite all of the sanctions, the West and especially Europe has sent Russia over $1 billion in hard cash every day this past week for energy alone.
Where does this leave us?
Hard to say! It is pretty weird. You have a terrible and serious armed conflict going on but (very flammable) natural gas continues to flow from one side of combatants to the other. Not just that but it continue to pass right through the warzone.
And quantity of this gas is rising, in absolute and relative terms and at a higher price. Lastly, this money is directly funding the state acting as the aggressor.
At the exact same time, the West has deliberately set no energy sanctions precisely because they do not want - for now - to exclude Russian supply from the global pool and, especially, the European market. But traders are avoiding the market anyway.
Last thought:
All of this may be pretty strange but it is also strangely heartening.
The war may be truly terrible, on the one hand.
But, on the other, overnight this conflict has demonstrated the utter foolishness of implicitly supporting the Putin regime through energy purchases. Now, far too late, countries and firms are finally making a rapid shift away from Russian energy sources for good.
Inherently, this shift will not just be towards other sources of fossil fuels but also alternative forms of energy. The energy transition is getting a major boost, it is just coming at a tremendous cost.
Less positively, the war doesn't end shortly then it is likely, however, that further sanctions will be coming. How long can it go before the obvious energy sanctions send oil to even greater heights and test Western populations support for Ukraine and the sanctions against Putin's Russia?
This tension: how to accept higher oil and gas prices in the short term vs a far faster transition to alternative forms of energy in the long term is what our politicians and policymakers must resolve in the coming months.
It also means that, even after this incredible week, we still like energy.
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