How Would Sanctions On Russian Energy Affect The World Markets?

Key Insights

• The U.S. signals that it is ready to consider sanctions on the Russian energy sector. 
• The markets are nervous as sanctions on the key exporter may lead to huge price spikes.
• The big U.S. oil producers will benefit from this scenario. 

The U.S. Remains Open To The Possibility Of Banning Russian Energy

White House spokeswoman Jen Psaki has recently stated that the U.S. was “very open” to imposing sanctions on Russia’s oil and gas industry.

Traders have already begun to price in the possibility of such sanctions. As a result, WTI oil moved above the $100 level and attempted to settle above $112.50.

In 2021, Russia produced an average 10.52 million barrels per day (bpd), and this production continued to grow as OPEC+ relaxed its production curbs. According to IEA, Russia’s total oil production in January 2022 was 11.3 million bpd. Russia is the world’s largest oil exporter to global markets, exporting 7.8 million bpd in December 2021.

Not surprisingly, the markets are nervous in the current situation, as excluding a huge player could lead to uncontrollable consequences.

The situation is even tenser in the natural gas market, although the problems are limited to Europe as the natural gas market is more fragmented. The natural gas market in the U.S. will likely remain stable regardless of any future sanctions on Russia.

Energy Demand Is Inelastic And Sensitive To Small Changes

The main problem is that energy demand is inelastic. When you need heat in winter or energy to drive a car from A to B, you cannot postpone consumption. Meanwhile, it’s not easy to store oil or gas, and even the biggest reserves in the world are limited. In this light, even small changes in the demand/supply balance can cause massive price spikes.

We had already seen this during the coronavirus crisis in 2020 when the price of oil futures temporarily went below zero as demand declined, and traders were ready to pay any price to avoid taking delivery of oil that could not be stored.

If the U.S. and EU impose sanctions on Russia, the opposite may happen. Suddenly, the world will rush to buy non-sanctioned oil, while oil producers will have a hard time boosting output. OPEC+ struggled to meet its quotas due to lack of investment during the coronavirus crisis, while Western oil companies have reduced investments due to the shift to green energy.

Who Wins If Russian Energy Is Hit By Sanctions?

At this point, it looks that big U.S. oil companies like Chevron, ConocoPhillips, Exxon Mobil (despite its exposure to Russia) will be the main beneficiaries of the hard sanctions scenario. However, it is clear that Western governments will carefully weigh such a decision as it could create true chaos in energy markets, especially in the near term.

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