Oil markets catch breath on signs of Ukraine diplomacy

Oil futures fell Feb. 15 across the board amid signs a diplomatic solution to the crisis in Ukraine remains possible despite US and European officials continuing to warn of potential sanctions.

At 2.36 pm Singapore time (0636 GMT), the ICE April Brent futures contract was down 65 cents/b (0.67%) from the previous close at $95.83/b, while the NYMEX March light sweet crude contract was 70 cents/b (0.73%) lower at $94.76/b. The fall followed crude prices closing close to $100/b Feb. 14.

In recent weeks, Russia's key crude grade Urals has felt the weight of possible sanctions, Rebeka Foley Oil Market Analyst, Europe & FSU at S&P Global Platts Analytics said.

"So far differentials don't seem to be responding to reports of the easing of tensions, but the ongoing situation has certainly added to volatility in crude markets," Foley said.

US and European officials have repeatedly warned of fresh sanctions if Russia launches an invasion of Ukraine. Officials have indicated the Nord Stream 2 gas pipeline could be a target for legislation, as well as financial sanctions, which could limit Russian companies accessing US dollar transactions and the SWIFT financial messaging system.

These restrictions could threaten Russia's ability to supply commodities to global markets.

On Feb. 15 warnings of new sanctions continued. British Foreign Secretary Liz Truss said new UK legislation had been laid out in recent days allowing for "much tougher sanctions targeting Russian oligarchs, banks and companies -- a ratchet of sanctions involving asset freezes, financial instruments and visa bans," she said.

The legislation published by the UK government includes targeting companies or individuals that benefit from, or give support to, state-owned or strategically significant companies, including in the energy, chemicals and transport sectors.

The EU's High Representative for Foreign Affairs and Security Policy Josep Borrell said if Russia invaded Ukraine "Nord Stream 2 will not become operational – that is quite reasonable and clear. It does not mean, however, that Nord Stream 2 would be stopped from working forever," speaking to the Today program on BBC Radio 4.

Not only NS2 would be impacted by a conflict, Borrell said. "The whole supply of gas from Russia to Europe will be affected. We have to be prepared for that – all sanctions imply retaliations. We have to be prepared for that," he said.

On Feb. 15 German Chancellor Olaf Scholz meets Russian President Vladimir Putin in Moscow as efforts to negotiate intensify.

Speaking ahead of the meeting, Putin reiterated that Russia had been a reliable energy supplier for decades, according to a statement posted on the Kremlin website.

"In all these decades there has not been a single interruption in the supply of energy resources from Russia, everything is done on market principles, and there are absolutely no questions and doubts here," Putin said.

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Lost flows

Platts Analytics currently forecasts Nord Stream 2 to start up in October 2022. It estimates that in this case it would contribute 68 million cu m/d to the Northwest Europe balance in winter 2022. It sees the impact of a suspension of NS2 on the winter 2022 balance to be only 47 million cu m/d, "as some of the lost flows are offset by greater use of Nord Stream 1 and Yamal-Europe compared with our base case," it said in a spotlight published Feb. 14.

Existing sanctions against Russia introduced in response to its role in the conflict in Ukraine in 2014 include a ban on transfer of technology used in deepwater, shale and offshore Arctic oil production. Financial sanctions restrict Russia's access to Western financing.

The impact of these measures on Western producers' operations in Russia has been limited, but the latest tension has increased risks around involvement in the Russian energy sector.

On Feb. 15 Glencore announced that it had agreed to sell its interest in Russian oil producer Russneft, after cooperating with the company since the early 2000s.

Meanwhile, Russia began to withdraw some troops following completion of planned military exercises, Russian Ministry of Defence representative Major General Igor Konashenkov said Feb. 15, according to a statement posted on the Ministry's Facebook page.

This followed a meeting between Russian Foreign Minister Sergei Lavrov and Russian President Vladimir Putin Feb. 14, during which Lavrov called for more time for diplomacy.

Outside Russia, politicians have said there is a window for diplomacy, although many continue to see an invasion as likely.