Putin Faces ‘Buyers’ Strike’ For Russian Energy

Anyone looking to OPEC+ for help with surging crude prices was disappointed this week.

The group once again stuck to the script, agreeing to proceed as planned with a 400,000 b/d output increase next month. Apparently, the proceedings lasted just 13 minutes. An attempt by Mexico’s energy minister to discuss Russia was given short shrift.

Brent on Thursday neared $120 (figure below), before erasing gains on news that a new nuclear deal with Iran might be imminent. The IEA said this week it’ll release 60 million barrels from its emergency stockpiles, while the Biden administration continues to lean on promises to tap the SPR. Some OPEC producers are simply constrained in their capacity to help by a hodgepodge of factors, some idiosyncratic, others shared or endemic.

The world is now backing away from Russian crude (“avoiding it like the plague” might be a more apt description), and that’s making the problem worse.

Traders and analysts this week described “scary” volatility and backwardation. This is another dynamic I attempted (with little success) to communicate to readers weeks ago. Nobody wants to get caught up with OFAC sanctions. That’s among the riskiest things you can do as a market participant — any kind of market participant. Rather than chance it, you just find alternatives wherever possible.

Serene Cheong and Sharon Cho did a good job of explaining, succinctly, what that currently entails. “The invasion of Ukraine has rapidly made Russia a commercial outcast, resulting in most buyers and shippers avoiding cargoes of its crude, diesel, heavy naphtha and vacuum gasoil,” they wrote, for a Bloomberg piece published Wednesday. “That’s causing abrupt changes in market structures, price dislocations and violent swings in freight rates [resulting in] a physical market for crude too chaotic even for veteran oil traders.”

Obviously that affects shipping rates because who wants to get caught at sea hauling Russian crude when word comes down that Janet Yellen has just made your cargo illegal?

Some of this is so obvious (and has been for a month now) that it’s hard for me to fathom why so many people seem surprised. PVM’s Tamas Varga called it “self-sanctioning” and noted that the West’s financial penalties are making it virtually “impossible” to finance trade with Moscow. Ironically, depending on the details of any new Iran nuclear agreement, Tehran’s oil could soon be less risky than Russia’s.

Commenting on OPEC+’s reluctance to provide relief for surging crude prices, RBC’s Helima Croft said the contention that “geopolitics, not changing market fundamentals” is what’s driving up prices “will increasingly strain credulity as Russian export volumes collapse due to a buyers strike and a divestiture movement that is gathering speed like a runaway train.”

She went further, noting that although there are no explicit energy sanctions yet, market participants are averse to dealing with a country subject to SWIFT bans and whose central bank is the subject of international sanctions. “Moreover, there is also a growing view that these energy carve outs will soon prove untenable as the Russian war strategy grows more gruesome and civilian casualties climb,” Croft added, before suggesting that when it comes to a hypothetical return of Iranian barrels, RBC “caution[s] that the deal is still not done and the sums entailed would simply be too small to backfill a major Russian disruption.”