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Risks to energy trades grow as West commits to Russia SWIFT ban, Central Bank sanctions

Highlights

Russian oil exports to see steeper discounts: McNally

More traders will 'back away' as sanctions risks expand

West on 'conveyor belt to Iran-style sanctions': analyst

The US, Canada and European allies Feb. 26 announced a new slate of sanctions on Russia for its invasion of Ukraine that will bar Russian banks from the international payment system SWIFT and tie the hands of its Central Bank. Details on how the sanctions will be implemented have not been unveiled, so it remains unclear if these new moves would specifically impact oil and gas flows.

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"Although the details have not yet been released, it appears to be narrowly targeted and thus should not directly affect Russian commodity exports," Rick Joswick, Head of Global Oil Analytics at S&P Global Platts Analytics said.

"However, it will likely make many buyers more hesitant to purchase Russian oil. That will tend to drive down the price of Russian crude oil even more until it ultimately clears outside of its traditional markets in Europe." he said, noting that Urals were already at record discounts to North Sea grades in prior days. "Another affect is that regular buyers of Russian oil, primarily in Europe, will seek non-Russian alternatives. That will tend to support the price of Brent crude and the broader market."

Grace periods or carve-outs could lessen the blow, said Eddie Fishman, an Obama administration sanctions adviser now with the Center for a New American Security.

Fishman said the Western response is on a "conveyor belt to Iran-style sanctions" unless Putin backs down in the coming days.

The SWIFT move will "further deepen the already-wide discounts that Russian oil exporters face as oil banks and traders back away," said Bob McNally, president of Rapidan Energy Group. "The US and Europe are hoping to keep Russian oil and gas flowing but drive down Moscow's revenues," he said.

Along with removing certain Russian banks from SWIFT, the new sanctions take steps to prevent the Russian Central Bank from sidestepping this blow to Russia's ability to finance its military operation, according to a joint statement from the US, Canada, European Commission, France, Germany, Italy and United Kingdom.

"We will paralyze the assets of Russia's central bank," EC Commission President Ursula von der Leyen said during a press conference streamed online. "This will freeze its transactions and it will make it impossible for the Central Bank to liquidate assets. And finally, we will work to prohibit Russian oligarchs from using their financial assets on our markets."

The move marks a significant tightening of Western sanctions as the US and EU initially left Russia's removal from SWIFT out of major sanction packages given the potential for global economic blowback.

Germany had been a holdout to the idea, with its Foreign Minister, Annalena Baerbock, expressing reservations as recently as Feb. 25, telling a German TV station that excluding Russia from SWIFT could harm Germany's energy supplies. But Baerbock changed her tune in tweets Feb. 26 that said the country was working on a "targeted and functional" approach that would limit collateral damage.

Crude and petroleum product largely moved lower Feb. 25 as the sectors weigh international sanctions and the fallout from Russia's ongoing invasion of Ukraine.

NYMEX April WTI settled $1.22 lower at $91.59/b on Feb. 25, and ICE April Brent fell $1.15 to settle at $97.93/b.

European gas prices are following oil upwards on concerns over supply security.

Platts assessed the front-month gas price on the benchmark Dutch TTF hub at Eur115/MWh on Feb. 24, up by 30% on the day and by 77% from the start of the year. Platts assessed the JKM LNG benchmark for April deliveries at $36.90/MMBtu on Feb. 24, up by 32% on the day.