Why oil prices are rising Ukraine? Why have energy markets changed so much in the last two weeks since the invasion of Ukraine?
Firstly, Russia now cornered, represents 9% of global output with only 2% excess capacity in the global energy market.
Market Efficiency:
An efficient market where OPEC+ and rest of world production continue to sum up to an efficient. However, that level is probably partly gone. The rest of the world is going to have to plan as though at least pieces of OPEC+ production are off the board (or will be for periods of time). Russia’s production still is not formally sanctioned yet. But it is 9% of world oil that is being choked in other meaningful ways. World spare capacity was already tracking down to 2%, which is an extremely low number. The Russia/Ukraine situation makes it clear why assuming efficient markets and not having flex is a poor strategic approach.
Market Access:
LNG markets are going to be significant, and market access for oil is going to be significant. Not speaking for my employer or anyone else, but at this point the logic of KXL, Energy East, and Northern Gateway should be extremely clear. The possibilities for Indigenous investment are many.
Producer Discipline:
There is a fine line between producer discipline (good (very) for shareholders) and producer wisdom (what is good for society). Not going for semantic arguments here. The point is that producers right now have very high FCF yields, are cleaning up balance sheets, and are looking after shareholders. They might have to start thinking about funding some production growth to avoid really bad market shocks. Before you throw stones, think about the….
Political Aspects:
Politicians always care once gas hits a certain price at the pump. Politicians until now have seen the green dream as the ideal, but are quickly going to have to come around to reality and take measures to avoid major, major energy shocks that will destabilize economies. Missing this from a strategic economic perspective is not excusable at this point.
In conclusion, hopefully in North America, we can arrive at some logic on Oil and Gas production, market access, and politics that will allow us to manage through the apparently turbulent years to come.
