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Oil traders ponder Putin’s reaction to Moscow attack, and decide: buy

Russia's response can only mean upward pressure on crude markets

moscow attacks oil Reuters/Maxim Shemetov
Putin will be weighing many factors as he decides how to respond to last week's attack in Moscow

The weekend’s tragic terrorist attack in Moscow seem certain to lead to a ratcheting-up of geopolitical tensions and an increase in the risk factor in global oil markets.

How President Putin responds to the outrage remains to be seen, but he is unlikely to take it lying down.

The question for oil traders is: will that inevitable response be confined to military escalation against Ukraine – which has protested it is innocent of involvement – or will it have wider implications that could further impact already brittle energy markets?

All the signs are that – whatever the Russian response – the action will all be on the upside of the current Brent crude price of $85 per barrel.

That is good news for the producers, including Russia, and bad for consumers. But also, paradoxically, bad news for the people who run the biggest oil supplier in the world, the US, which is on the cusp of a presidential election campaign.

The prospect of Russia lashing out in revenge is another destabilising factor in an already volatile oil market, which has been struggling with the implications of the war in Ukraine, the potential geopolitical ramifications of the Gaza conflict, huge swings in trading patterns as a result of Western energy sanctions, and the continued economic uncertainty of the biggest oil consumer, China.

Traders point out that, perversely, neither Ukraine nor Gaza – both marginal in the global energy supply and demand equation – should affect crude markets. But both have the potential to increase geopolitical risk and seriously impact oil fundamentals.

Setting aside Gaza for the moment (though not trivialising what is going on there), it is the Russian situation that commands immediate attention. Two years of Western energy sanctions have increasingly turned the screw on Vladimir Putin’s main revenue stream.

It must be said that the effect on Russia’s ability to wage war has not been as severe as many in the West hoped. Through a mixture of sanctions evasion (some of it illicit), finding new foreign demand in Turkey, India and China, and supplying the domestic needs of Russia’s war economy, Moscow’s revenue stream has held up well for much of the war period.

There are signs this is going into reverse. The finance ministry said in January that revenue was down 24 percent in 2023 – when the main sanctions were introduced. The US Treasury estimated the decline at 40 percent.

India, which has been a lifeline for Putin for most of the war, has said it will no longer buy crude shipped from Russia on Sovcomflot

Revenue from exports is trending down, thanks to the price cap imposed by sanctions, but production is still aimed at 9 million barrels per day (bpd) in June under the most recent Opec+ agreement, continuing cuts but maintaining Russia’s place as the world’s second largest oil producer after the US.

But again, there are signs that this export volume is coming under pressure, too. India, which has been a lifeline for Putin for most of the war, has said it will no longer buy crude shipped from Russia on Sovcomflot, the national oil tanker fleet, after sanctions were imposed.

China has been buying big volumes of Russian crude, but has been a fickle customer, only interested when prices are low. If the upward trend continues, China has other suppliers, not least in the Middle East, to which it is already tied by long-term contracts for most of its imports anyway.

Russia cannot survive on Turkish oil exports alone.

Added to this, the domestic energy situation within Russia is showing signs of strain, not least from recent Ukrainian drone attacks on refineries. These have cut 600,000 barrels of refining capacity, according to the head of Gunvor, the Swiss-based oil trader which knows a thing or two about Russia.

The White House, according to reports, has asked Ukraine to stop these attacks, fearing the impact on global prices and President Biden’s re-election prospects.

But this is overblown. If the Ukrainians restrict their drone offensive to Russian refineries, it will hit Russian consumers most, rather than crude exports, with little immediate effect on global crude prices.

Russian exports of refined gasoline have already been banned in favour of domestic consumption, though they were never as important as exports of other refined oil products.

Energy strains at home risk alienating the Russian people who earlier this month voted for Putin to continue as president and are now in a state of shock following the Moscow terror attacks.

Putin will be weighing all these factors as he decides how to respond. But oil traders see only commercial upside, whatever the Russian president does.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE

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