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Oil Market Update
Ukraine crisis can trigger oil spike and tip EU back into recession
Nordea Global Research, 02 May 2014
Russia as important oil as gas supplier to Europe
Tight European oil market sensitive to oil supply disturbances
Disruptions to Russian oil flows will have huge impact on oil prices
Embittered political climate, oil prices at USD 150/barrel and high financial market uncertainty can tip EU back into recession
Oil price spike and flight to safety a recipe for broad-based USD strengthening and lower global rates: three risk scenarios
US shale oil or SPR release will not prevent oil price spike
The oil story: Russian conflict could trigger a sharp oil price spike and push the European economy back into recession
Recent events in Ukraine have raised concerns about the risks of disruption in Russian energy exports. Memories have been awakened of episodes in 2006 and 2009 when Gazprom halted all Russian gas flows through Ukraine, amid pricing disputes, completely cutting off supplies to Southern Europe and partially other European countries. Not nearly as much attention has been paid to the risk of a disruption to the oil flows. Russia is as important an oil exporter to Europe (of both crude and refined products) as it is a gas exporter, but unlike for gas, only a relatively small portion of its overall oil exports to Europe transit through Ukraine. Oil, in contrast to gas, is easy to store, ship and trade, which means that the markets more flexible and a single customer has less immediate scope for action. Nevertheless, the consequences of a cut in Russian oil supplies could be as rave since the oil global oil market has little back-up capacity to lean on, European commercial oil stocks are low and there is no real substitute for oil in the transportation sector (which accounts for more than 60% of total oil consumption worldwide). As a result a halt in the oil deliveries from Russia to Europe will spark a sharp spike in oil prices and in a worst case scenario an oil crisis. A longer-lasting disruption to oil supplies and an extended period with high oil prices will curb the potential for Euro-zone economic growth and slow down growth in the global economy. If the oil price spike is accompanied by a sharp fall in confidence and financial players recede to safe havens, the impact on global growth and financial markets will be even more severe. The questions are therefore how vulnerable the European oil market is to a halt in oil deliveries from Russia and whether the European economy can withstand a protracted period of high oil prices?
Thina M. Saltvedt
Chief Analyst Macro/Oil (Ph.D.) Global Research, Norway +47 22 78 79 93 @ThinaSaltvedt thina.margrethe.saltvedt@nordea.com
Contents
The Oil story p1Europe is highly dependent on Russia p2 Europe vital for Russian energy export p3 Russia has excess pipeline capacity p4 Ukraine as a transit country p5Ukraine dependency on Russia p5Big impact on oil prices p5Three risk scenarios p6US shale and SPRs will not prevent oil price spike p8Political turbulence and high oil prices can push the EU back in recession p8
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Oil Market Update
2
Europe is highly dependent on Russian oil and oil product deliveries…
The oil production in the EU peaked in 1999 and has since fallen by almost 60% and thus the region imports a large chunk of its oil from Russia. Last year the EU imported around 3.05m b/d of Russian crude (36% of total net crude imports) and 1.02m b/d of oil products (23% of net total imports). Import dependence on Russia for crude oil is higher on an absolute basis than for products, although Russia’s share of net product imports is higher. Overall the EU is only a relatively small net importer of products as the region exports a substantial amount of petrol. Nevertheless the EU is heavily dependent on import of gasoil from Russia accounting for about 620k b/d, or 69% on a net basis. The main gasoil consumers can typically be split into two main categories: heating oil and fuels such as marine diesel and diesel for road transportation. Heating oil consumers can to a large extent switch to other energy sources such as natural gas and coal if Russian exports are halted, but for the transportation sector there are not many other alternatives.
Brent oil price and NBP natural gas prices
Source: Reuters EcoWin
020304050607080910111213140255075100125150175GBp per Therm and USD/barrelNatural Gas, National Balancing Point, greenBrent Crude
Russian Oil Exports in 2013
Source: International Energy Agency and Nordea Markets
In mb/dWorldOECD EuropeOECD Europe % of totalCrude Oil4.303.0571%Products2.801.0236%
Total 7.10 4.07 57%
Europe’s net oil importfrom Russia at 32% EU heavily dependent onRussian gasoil
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Oil Market Update
3
Therefore, a stop in the supply of oil products from Russia would have a relatively strong effect on the European fuel market, particularly diesel car owners, trucks, buses, small to medium-sized ships and ferries.
Source: EU, 2010 figures
… but Europe is vital market for Russian energy export
Although the EU receives a large share of its energy imports from Russia, the importance of the European market to Russia is also very high. Commodities exports are an important driver of the Russian economy. In 2013 energy resources accounted for around 70% of total exports (USD 515bn annual) from Russia, and the revenues generated from the production and sales of energy represented almost 52% of the country’s federal budget revenues.
EU crude oil import in % by country of origin
‐
5.00
% 5.00
% 15.00
% 25.00
% 35.00
%Russian
FederationNorwaySaudi
ArabiaLibyan
Arab
JamahiriyaNigeriaKazakhstanIraqAzerbaijanAlgeriaRest
%
of
Total
Imports
Russian exports split on products in % of total
Energy resources 70% ototal Russian exports
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