The Second Wave of Russia's Oil Shock Has Begun
190The Second Wave of Russia's Oil Shock Has Begun
On Thursday, February 24, 2022, oil and gasoline storage tanks of the Sinclair Casper Refining Co. oil refinery in Casper, Wyoming, United States, were emptied. Oil prices continued their decline from a seven-year high, dropping down below $100 a barrel in London as traders grappled with a choppy market environment as a result of Russia's invasion of Ukraine, according to traders.
The lights are going out in the Russian oil sector - figuratively speaking.
Following its invasion of Ukraine, the Kremlin is attempting to hide the full extent of the consequences of statutory and informal energy restrictions. However, Moscow cannot hide from the satellites orbiting over Siberia, which are measuring the quantity of light emitted by its oilfields as undesirable gas is burnt, or flared: the higher the output, the greater the amount of flaring and light emitted — and the reverse is true.
Flaring data, along with anecdotal information from traders and leaked official Russian figures, show that Moscow is now succumbing to the effect of government-imposed sanctions and corporate self-sanctions eight weeks after the outbreak of hostilities. Compared to pre-war levels, Russian oil production has decreased by an average of 10%.
Russian oil output has dropped dramatically so far in April, with the monthly average expected to fall to 10 million barrels per day, the lowest level since September 2020. Cliff Edge |
More output losses are expected when Western refiners and merchants pull out of Russia as their supply contracts expire in the coming weeks, according to industry analysts. The European Union is also contemplating taking baby steps to lower its imports of Russian oil, in an effort to discover methods to circumvent German resistance to the proposed reductions in purchases. "We are now working clever methods so that oil may also be included in the next sanctions package," EU Commission President Ursula von der Leyen told Bild am Sonntag. "We are building smart mechanisms so that oil can also be included in the next sanctions package."
In the eyes of consumers – as well as central banks combating inflation – falling Russian output heralds the beginning of a second, and more prolonged, round of oil price hikes. The stakes are much greater for Vladimir Putin, whose cash from oil and gas sales has so far assisted in cushioning the impact of international sanctions, supporting the currency, and funding his military machine. In addition to the immediate expenses of the conflict, a sustained fall in output that overcomes any price rise would be a longer-term drag for Russia's economy.