The UK will ban Russian oil imports in conjunction with the US, a move that threatens to exacerbate a highly combustible standoff between Vladimir Putin and the West.
The UK’s decision isn’t applicable to Russian gas, but the US embargo will also apply to LNG and coal. The bans will be phased in over a period of months.
“We will not subsidize Putin’s war,” Biden told Americans on Tuesday. “Defending freedom comes with costs,” he added, conceding that the Kremlin’s decision to invade its neighbor is “already hurting Americans at the pump.” But Russia’s economy is “cratering,” Biden declared, on the way to saying that although Putin seems determined to press ahead with the war “no matter the cost,” he will “never” secure victory.
The Biden administration’s decision was telegraphed last week, and markets attempted to price it in on Monday, when Brent surged to $139 a barrel (figure below).
On Monday evening, Russia’s Alexander Novak threatened “catastrophic consequences” for the energy market in the event the US and Europe moved to declare Russian crude contraband. Oil prices, he warned, could rise to $300 a barrel.
For now, the US and the UK are acting on their own. Germany was still opposed to a European ban, fearing the cessation of natural gas flows, which Novak said Moscow reserves the “right” to curtail as a retaliatory measure.
“While the headline of further US sanctions are likely to support prices, such a move would likely have negligible impacts on global crude and products markets,” Goldman’s Callum Bruce and Damien Courvalin said, noting that US imports from Russia are just over 400 kb/d, down markedly from a high of 770 kb/d during Q2 of 2021.
“Volumes this small are well within the market’s ability to redirect flows and as such we would expect minimal overall impact on crude fundamentals,” Bruce and Courvalin remarked, albeit while cautioning that formal bans “will nonetheless likely continue to severely curtail Russian seaborne oil exports, due to the threat of additional sanctions or of public censure.”
That latter bit gets at the real problem. Traders are already self-sanctioning Russian commodities, leading to a bifurcated market. Commodities have descended into chaos this week (see here and here). The announcement from the US and the UK will obviously inflame tensions.
“This is the tightest fundamental backdrop in years and the developments in Russia/Ukraine have ignited a market that was already a coiled spring,” RBC’s Michael Tran and Helima Croft wrote Tuesday.
At the same time, China looks poised to buy (or up existing) stakes in Russian energy and commodities companies. Sources told Bloomberg that Beijing is currently talking with its own state-owned giants “on any opportunities for potential investments in Russian companies or assets” in order to “bolster China’s imports as it intensifies its focus on energy and food security.” Two days ago, Xi emphasized the importance of securing adequate food supplies for the country’s teeming masses.
Beijing’s opportunistic grab speaks to another provocative missive by Zoltan Pozsar, who suggested China might attempt to establish what he called a “new world monetary order.” Beijing, he said, could “print renminbi to buy Russian commodities,” in effect giving rise to a “Eurorenminbi market,” an event constituting “China’s first real step to break the hegemony of the Eurodollar market.”
Any new investments by China in Russian energy or commodities wouldn’t represent support for Russia’s invasion of Ukraine, sources said.
In the same Tuesday note cited above, RBC’s Tran asked, “How high can oil prices go?” He then answered himself: “Pick a number, this is a market in disarray.”