Russia’s Invasion of Ukraine: New Oil Order?

This new OIES presentation raises some key questions:

• How are oil markets coping with the shock so far?
• What types of trade patterns and trading practices are emerging? Will these shifts be permanent?
• Russian invasion has raised the ambition for an accelerated energy transition away from hydrocarbons (at least in Europe). Does the Russian invasion ease the removal of the barriers needed for an accelerated energy transition? Or are there new factors that can work in the opposite direction and actually slow or delay the transition for a few years?
• Are we likely to see more comprehensive energy policies that integrate sustainability, security, affordability and economic development/competitiveness? What are the implications of such a broader energy policy?

Some key points:

• Russian invasion of Ukraine represents a paradigm shift for European energy markets and EU energy relations
• Widespread belief that no return to previous order and European energy markets are searching for a new normal (diversification of supply sources, acceleration towards renewables, energy security concerns)
• But the transition to the ‘new normal’ can be long and bumpy and will not proceed evenly across the globe
• In oil markets, size of Russian output disruption has been limited so far but this could changing rapidly especially after the EU’s proposal to phase out Russian oil imports into the EU
• Oil markets more than ever subject to policy levers (embargos, sanctions, unilateral cuts) which is creating high uncertainty and price volatility and reducing liquidity from mature markets
• Extent of self-sanctioning by the private sector and commodity traders key feature of this shock
• New patterns of crude and products trade flows emerging (Russian crude towards East, Middle East and US crude towards Europe; Europe has to source products such as diesel from further away places)
• New trading practices (blending, STS transfers) and segmented markets (Russian origin versus non-Russian origin products)
• Exposed the reality that despite ambitions for a fast energy transition towards new energy sources, current energy order is still highly reliant on hydrocarbons (oil, gas, coal) limiting foreign policy options
• Energy security remains at the core of energy policy and energy security comes at a cost and can derail other objectives
• Transition to new energy order in a smooth and an orderly manner may not even be possible as frictions between key players in the global scene intensify (US-China, Russia-West, slowdown in globalization)

By: Bassam Fattouh