The situation across energy markets is very serious, IEA Executive Director Fatih Birol said Tuesday after the US and other economies agreed to release oil reserves.
Investors will be watching for a response from OPEC+ when the cartel meets Wednesday to discuss April supply, but only a modest increase is expected despite the turmoil rippling through the sector.
The global oil market had already tightened significantly prior to the invasion after economies rebounded strongly from the pandemic, and the disruption to Russian exports has the potential to drive crude prices even higher.
Traders are paying the most in more than two years betting that will happen, while banks including Morgan Stanley have boosted near-term forecasts.
Governments worldwide are facing rising inflationary pressure as the fallout from Russian sanctions drives energy, metals and grains prices higher. That’s prompted the US and its allies to release 60 million barrels of strategic oil reserves to tame prices, though similar action late last year had little impact.
Russia’s flagship Urals crude oil was offered for sale at a record discount but got no bidders, highlighting the caution from buyers as they navigate mounting financial sanctions. While the US and its allies have so far stopped short of imposing penalties directly on Russian commodities, trade is halting as banks pull financing and shipping costs surge.
“I can only see oil heading higher,” said Daniel Hynes, senior commodities strategist at Australia and New Zealand Banking Group Ltd.
“The market is waking up to the reality that we are already experiencing constraints on Russia oil without any formal sanctions. It’s hard to see what OPEC can do.”
Prices
Brent for May settlement gained 4.5% to $109.73 a barrel on the ICE Futures Europe exchange at 12:01 p.m. Singapore time after climbing as high as $111.09.
WTI for April delivery rose 4.6% to $108.20 on the New York Mercantile Exchange after gaining 13% over the past two days.
Brent remains in deep backwardation, a bullish structure where prompt barrels are more expensive than later-dated cargoes, indicating nervousness over tightening supply. The benchmark’s prompt spread was $4.99 a barrel, compared with $1.39 at the start of last month.
Russia’s invasion is entering a deadly new phase, which could result in more sanctions. President Joe Biden is facing pressure from lawmakers in both parties to cut off US imports of Russian oil and gas to escalate the cost to Russia, which would likely provide another boost to global prices.
Read: BP to exit its 20% stake in Russian oil giant Rosneft
The impact of Russia’s invasion of Ukraine has reverberated far and wide. Oil majors such as BP Plc and Shell Plc are exiting Russia, while banks across the globe including in Singapore are restricting trade financing for raw materials. Even the residents of a tiny archipelago off Scotland are doing everything they can to stop a Russian oil tanker from docking.
Separately, the American Petroleum Institute reported US crude inventories fell by 6.1 million barrels last week, according to people familiar with the data. Stockpiles at the key storage hub in Cushing also declined, the API said. Energy Information Administration figures are due later Wednesday.
“This military action represents a fundamental change,” BP Chairman Helge Lund said in a statement.
“It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”
Rosneft wasn’t immediately available to comment.
BP didn’t say whether it was planning to sell its roughly 20% stake in Rosneft, or simply walk away. Any potential buyer would have to navigate a tightening web of economic sanctions that would make any transaction extremely difficult.
In a memo to employees, Looney said there would be “financial consequences” from the move that would show up in its next quarterly results. A spokesperson said there could be a write-down of as much as $25 billion.
The London-based company did confirm that it would no longer account for its share of oil and gas reserves, production and profit from its stake in Rosneft.
Looney will also resign with immediate effect from the Russian company’s board, as will his predecessor Bob Dudley.
BP will also exit its other business in Russia, which include three joint ventures with a carrying value on its books of about $1.4 billion.
Financial shock
The move – and the associated financial costs – will come as a surprise to investors on Monday.
BP shares have risen 15% this year, bolstered by rising oil prices even as Russian forces were massing on Ukraine’s border.
In early February, Looney was still arguing that BP could “avoid politics” in Russia, which was “a large member of the energy system.” The shock of Putin’s large military incursion into Ukraine made that position untenable.
BP has a longer history in Russia than many of its peers. It was one of the first Western oil majors to establish a presence in Russia after the collapse of the Soviet Union.
John Browne, the chief executive officer at the time, bought a stake in Sidanco in the 1990s, which eventually morphed into TNK-BP, a joint venture with a group of billionaires.
That gave BP direct operational control of Russian oil fields, with large numbers of expat staff in the country.
It was highly profitable, but also fraught with tension between the oligarchs and their Western partners. A bitter battle for control in 2012 ultimately resulted in BP exchanging its stake in TNK-BP for $17 billion in cash and a large chunk of Rosneft shares.
BP’s stake in the Kremlin-controlled oil producer had a lot of symbolism, marking the continuation of three decades of operating in the country, but in many practical ways the alliance was shallower than it appears.
While BP reported its share of Rosneft production, reserves and profit for accounting purposes, it didn’t have direct stakes in any of Rosneft’s fields nor physical access to the hydrocarbons they produced.
The London-based company did receive regular dividends from Rosneft, which last year amounted to $640 million, compared with BP’s total operational cash flow of $23.6 billion.
While BP had the largest interest in Russian oil and gas, it’s Big Oil peers also hold important stakes in the country.
TotalEnergies SE’s operations in Russia represent around $1.5 billion of its total cash flow, or around 5%. It has a stake in gas producer Novatek as well as a large interest in the Yamal LNG project.
Shell Plc has a large holding in the Gazprom PJSC-led LNG project Sakhalin Energy, while Chevron Corp and Exxon Corp have a presence in lubricants.
Main Image: Financial Times
