Markets in disarray
In July I wrote about the substantial changes experienced by the global residual fuels market five months after Russia’s invasion of Ukraine (click here to view previous article). We are now 10 months on from this seismic event, and so I wanted to revisit this topic and examine some of the biggest changes to trade flows and logistics.
War, record energy prices, inflation, more supply chain pain and more Covid. 2022 has felt like one hell of a decade, not least dominated by Russia’s invasion of Ukraine. With the horrors of the war, Russia’s attack dragged the world closer to a recession, causing the price of everything, from food to energy, to spike.
Given its huge land mass, Russia plays a key role in the global energy markets, accounting for 12% of the world’s oil and 17% of its gas supply. It is also the world’s largest producer and exporter of residual fuel oil – an industrial fuel used in shipping, power generation and refining.
In response to its attack on Ukraine earlier this year, governments and businesses in the west began distancing themselves from the country, curbing oil purchases in an effort to deprive the Russian government of cash to fuel its war. This threw the global energy markets into disarray and arguably set in motion one of the largest or most significant reshuffling of global crude oil and refined fuel trade flows, away from the US and Europe towards Africa, the Middle East and Asia.
This is a mammoth effort when one considers Russia’s pre-pandemic seaborne exports averaged about 9mbd. Some of the biggest shifts in trade flows as a result of this are:
The great migration – Russia’s invasion wreaked havoc on global energy prices, pushing a number of commodity prices to record highs, while forcing some of Russia’s traditional partners and energy consumers to quickly untangle years’ long relationships while scrambling to find alternative supplies. Russia too had to respond by securing new customers further afield in the east. Having earned itself bag loads of sanctions and joining the ranks of Iran and Venezuela, Russia is helping fuel the growth in the global ‘shadow’ tanker fleet. This is also adding to inflated energy prices by shrinking the pool of tankers in the commercial fleet.
The long haul – Russia’s new found customer base in the east doesn’t come cheap. Russia is forced to give steep discounts on its oil exports to entice its clients while also securing the logistical supply chain needed to transport the oil thousands of miles further away, often involving clandestine and time consuming ship-to-ship transfers at sea – unchartered waters for many of Russia’s suppliers.
Filling the void – can Russia fully replace western demand for its oil since European and G7 sanctions took effect in December for crude oil and then in February for refined products? Global economies are sputtering and this is already having very visible effects on oil demand with oil prices currently back to pre-invasion levels.
Having probably inflicted irreversible damage to its self-proclaimed status as a ‘reliable energy partner’, Russia and the world of energy consumers must also adapt to the new reality of increasingly murky and inefficient energy trade flows. While the world in 2022 took a few steps back in its global fight on climate change as a result of the energy crisis, in the long run Russia’s actions are highlighting the pitfalls of relying on a few major energy exporters. In the longer run, this will accelerate the transition towards sustainable energy sources.