US-Ukraine resource deal leaves energy markets cold

A natural resources deal between the US and Ukraine might revive a diplomatic push for peace with Russia, but it failed to convince oil and gas markets May 1 of any imminent breakthrough that would ease sanctions and increase supply.

US President Donald Trump had sparked growing doubts over his resolve to broker a peace deal by expressing frustration with a lack of progress. However, the new profit-sharing agreement for Ukrainian resources announced April 30 is expected to keep the US at the negotiating table by providing a new financial incentive to secure a deal.

In March, early ceasefire talks prompted analysts to start assessing the potential impact of relaxed sanctions on Russia, which could return its energy flows to the European market and reroute long, inefficient trade routes.

Goldman Sachs economists said global oil prices could drop $3/b if sanctions are waived, forecasting 60 million barrels of excess oil on the water could be rerouted.

In the new economic agreement dated April 30, the US Treasury Department said the deal underscored both parties' "durable partnership" and commitment to peace.

The economic partnership formalizes a 50:50 profit-sharing agreement for projects in minerals, oil and gas, in exchange for new military assistance from the US, the document said. New investment is expected to focus on critical minerals such as graphite, titanium, and lithium, and could support new drilling in Ukraine's stalling hydrocarbons sector.

The announcement around 22:00 GMT came after a steep intraday oil market selloff in ICE Brent futures, which took prices from $63.30/b April 29 to $61/b April 30.

By 10:00 GMT May 1, prices had dropped to below $60/b in intraday European trading, while in gas markets, Dutch TTF futures have continued to hover around Eur32.31.

Market skepticism

Traders and analysts were broadly unmoved by the announcement, seeing a lack of Russian cooperation as a greater barrier to progress.

A series of partial or short-term ceasefire commitments from both Russia and Ukraine have contributed to growing market fatigue around new announcements, and despite growing noise around a potential deal, pundits say Russian supply injections could still be some way off.

"The market is basically saying show us the deal first before we try to price in what it actually means, because it's one thing what the US and Ukraine have done and another whether Russia gives a damn or not," said Ole Hansen, head of commodity strategy at Saxo Bank.

Bjarne Schieldrop, chief commodities analyst Sweden's SEB bank, agreed that a lack of reaction in the gas market, one of the first likely to see the return of Russian supply in the case of a peace deal, signaled limited enthusiasm over diplomatic progress.

On the contrary, closer ties between the US and Ukraine could translate to new, tougher sanctions for Russia if it is seen to be holding up talks, he said.

"We've seen no movement on the Russian side," said Schieldrop, noting frustration from Moscow with threats over "bone crushing sanctions" unless they show willingness to negotiate.

On March 30, Trump had previously threatened a major escalation in US sanctions policy, warning of "secondary tariffs" for Russia's oil consumers. This move has so far been deliberately avoided because of its inflationary effects.

Price weakness

As a new, weaker oil market environment has tested US shale producers, Trump is now under less pressure to curb prices and could have more wiggle room to tighten sanctions.

Trump has been outspoken in his ambition to achieve cheaper oil. However, after his tariff policies triggered a market meltdown and OPEC+ announced a surprise production hike, prices have hovered close to four-year lows.

On April 30, WTI crude futures plunged again to $58.21/b, as signs that OPEC+ could be willing to weather lower oil prices triggered a steep market selloff.

As a result, levels have stayed well below the $65/b threshold Permian Basin oil producers say they need to make production profitable, and could put political pressure on Trump.

Ron Smith, a consultant at Emerging Markets Oil & Gas Consulting Partners, said that actual breakeven prices could be lower than $65/b, noting a lack of reduction in US rig counts despite recent price weakness.

Instead, he said that $60/b could be a more realistic target oil price for the US administration. "60 is not a bad number, it's an inflection point between the positive effects on the consumption side and the effects of maintaining a current level of production," he said.