Supply, price risks loom as markets wait for US sanctions response to Russia

Global energy and commodity markets were weighing massive risks Feb. 24 while waiting for the US response to Russia's military invasion of Ukraine, after the Biden administration has promised "swift and severe" measures for months.

President Joe Biden is set to deliver remarks at 1730 GMT Feb. 24 after meeting with G7 leaders.

A joint statement from the European Council said the 27 heads of state and government of the EU would meet Feb. 24 to "agree in principle on further restrictive measures that will impose massive and severe consequences on Russia for its action, in close coordination with our transatlantic partners."

The largest market impacts of a sanctions response would come from blocking energy flows or banning Russia from dollar trades and the international financial messaging service SWIFT — all of which would come with global economic blowback.

Sanctions experts continue to expect broad US sanctions on Russia's financial sector after the Biden administration blocked VEB, Russia's fifth-largest bank, in an initial sanctions package Feb. 22.

Both tight oil supplies and prices surging above $100/b continue to make direct energy sanctions less likely, but it will be impossible to keep energy "off the table long term," said Eddie Fishman, who advised on sanctions issues in the Obama administration's State Department.

Fishman said the US could block investment in and financing for all Russian oil and gas projects to target future production, similar to 2014 sanctions, or it could announce plans to reduce Russian oil exports in phases over time.

SPR coordination

The Biden administration is "exploring" another release of emergency oil stocks with ally countries if needed, a White House official told S&P Global Platts Feb. 24. "No decisions have been made," the official said.

The White House signaled Feb. 22 that it was building a case for a globally coordinated crude stockpile release as the Russia-Ukraine conflict escalated, threatening to spike oil prices and disrupt supplies.

The International Energy Agency said Feb. 22 that member countries "stand ready to act collectively to ensure that global oil markets are adequately supplied."

IEA members hold close to 4.16 billion barrels in total oil stocks as of the end of 2021, including 1.5 billion barrels held by governments as emergency reserves. The group of the world's top oil-consuming countries requires members to hold 90 days of net imports in government or commercial storage.

Biden ordered a release of 50 million barrels from the SPR in November when WTI prices were about $78/b. The SPR held 582.4 million barrels as of Feb. 18, the lowest since September 2002.

On guard for cyber threats

Energy markets are also on guard for potential cyber-attacks, after White House officials urged US critical-infrastructure operators in recent weeks to be alert and remain vigilant to potential cyber threats from Russia as the country has a history of incorporating cyber into its military attacks.

In preparation, the US has focused on shoring up domestic cyber defenses, providing support to boost Ukraine's cyber posture, and working closely with allies and partners to defend against and disrupt malicious cyber activities.

Power, oil, and gas infrastructure are among attractive targets given the level of disruption a breach of those assets could cause and are potentially vulnerable as those industries moved to quickly digitize.

Critical infrastructure has also become an increasingly enticing target for ransomware groups, as the urgency to get systems back online, avoid supply chain disruptions and recoup extracted sensitive data and proprietary information has provided cybercriminals significant leverage to demand payment. Cybersecurity experts have said that hacking groups could opportunistically initiate breaches to profit from the geopolitical unrest.

No specific or credible cyber threats to the US have been made public.

Surging oil, gas prices

Oil and gas prices moved sharply higher overnight on the Russian troop movement.

At 1443 GMT, NYMEX April WTI was up $6.03 at $98.13/b and ICE April Brent was $6.75 higher at $103.59/b.

The TTF March natural gas price rose as much as 35% early Feb. 24 and was up 31% at Eur117/MWh ($130.56/MWh) as of 1127 GMT.

Europe is dependent on Russian gas imports during high periods of winter demand and a major importer of Urals crude to feed refineries in the world's second-largest economic block. Any tougher US and European sanctions on Moscow could make it harder for commodities to be traded by targeting banks and transaction processes across borders.

On Feb. 23, Biden said the US would impose sanctions on Nord Stream 2 AG, the company that built Russia's 55 Bcm/year gas pipeline to Germany, and its corporate officers, a day after Germany halted certification of the project.

Russia was the No. 3 oil supplier to the US in November after Canada and Mexico, according to the most recent US Energy Information Administration data.

Platts Analytics expects any disruption in the Russian crude to have a minor effect, as US refiners could backfill by easing exports of US Gulf Coast sour crudes, such as Mars. Lower US imports of Russian oil feedstocks would have a bigger impact, but Gulf Coast refiners could run Canadian or Latin American heavy grades at the cost of margins.