On the energy markets, Putin wins the war
Electricity costs for homes and businesses are expected to soar from October as soaring oil revenues allow Putin to sacrifice gas revenues and cut supplies to Europe. Prices in the UK are set to jump by 75%, while in Germany some municipal utilities have already warned that prices will rise by more than 100%. Russia has succeeded in militarizing energy supplies; Western governments will come under increasing pressure to spend billions either subsidizing household bills or, as is already the case in France, taking over power companies.
The first indicator showing how Putin has reversed the oil trend is Russian crude production. Last month, the country’s production recovered to near pre-war levels, averaging almost 10.8 million barrels a day, down slightly from the 11 million pumped in January just before the invasion of Ukraine. According to industry estimates, oil production is slightly higher so far this month.
It’s not a blow: July marked the third consecutive month of oil production recovery, with production up significantly from this year’s low point of 10 million barrels set in April, when buyers Europeans began to flee Russia and Moscow hastened to find new buyers.
After that initial struggle, Russia found new customers for the roughly one million barrels a day that European oil refiners stopped buying due to self-sanction. Most of this crude ends up in Asia – especially India – but also in Turkey and elsewhere in the Middle East. And some continue to appear in Europe, with buyers still buying Russian crude ahead of the planned introduction of official sanctions in early November. Anyone who bet that Russian oil production would continue to fall – myself included – was wrong.
The second indicator is the price of Russian oil. Initially, Moscow was forced to sell its raw flavors at huge discounts to other varieties to attract buyers. In recent weeks, however, the Kremlin has regained pricing power, taking advantage of a tight market.
ESPO crude, a category of Russian oil from the Far East, is a good example of the new trend. At its lowest early this year, it sold at a discount of more than $20 a barrel to Dubai crude, the regional oil benchmark for Asia. Recently, ESPO crude changed hands at parity with Dubai. Urals crude, Russia’s flagship oil export to Europe, does not profit as much as ESPO, as its main buyers have traditionally been countries like Germany rather than India. But its price is also recovering, recently selling between $20 and $25 a barrel cheaper than benchmark Brent, after trading at a discount of nearly $35 in early April.
Moscow is finding new commodity traders, often operating from the Middle East and Asia and likely funded by Russian money, willing to buy its crude and ship it to hungry markets. With Brent crude hovering around $100 a barrel and Russia being able to offer smaller discounts, there is a lot of money flowing into the Kremlin. For now at least, energy sanctions are not working.
The final indicator of Russian success is political rather than market-related. In March and April, Western policymakers were optimistic that the OPEC cartel, led by Saudi Arabia and the United Arab Emirates, would abandon its alliance with Russia. The opposite was the case.
Despite a trip by US President Joseph Biden to Riyadh, Putin has retained his influence within the OPEC+ alliance. Shortly after Biden left Saudi Arabia, Russian Deputy Prime Minister Alexander Novak, the national cartel relationship manager, flew to the kingdom. Days later, OPEC+ announced a tiny increase in oil production, keeping pressure on global energy markets.
Victory in the oil market means Putin can afford to forgo revenue by limiting natural gas sales to Europe, putting pressure on Berlin, Paris and London, which are bracing for massive retail price hikes energy and potential shortages that could lead to rationing this winter. Moscow is making so much money selling oil that it can also afford to restrict crude supplies to Eastern European countries, as it did earlier this week.
A combination of cold weather, growing demand for electricity and a spike in prices later this year is likely to undermine Western support for Ukraine. European politicians who have been eager to win international kudos by showing their support for Kyiv may be less willing to foot the domestic bill to avoid energy poverty among their own constituents.
In public, European governments are still determined to wean themselves off Russian energy. Privately, they must recognize the hardships this position threatens to inflict on their economies. Putin is winning the energy battle; let’s hope that leverage isn’t strong enough to induce Western politicians to soften their stance on the real war.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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