The first day of March proved to be a difficult day for the global oil market as the price of crude oil shot up on the list of concerns of impending supply chain disturbance. Over the past few days, countries across the globe piled on economic sanctions on Russia in response to its ongoing ‘special military operation’ in invading Ukraine.
Brent crude futures, which began their notable price movement on February 27, rose $7.00 or 7.1%, settling at $104.97 a barrel. This was after the benchmark hit its seven-year record of $105.79 at the start of the Russian invasion. US West Texas Intermediate or WTI crude climbed up by 8.0% or $7.69, settling at $103.41.
“The tight global oil market could become even tighter following last week’s Russian invasion of Ukraine,” said the President of Ritterbusch and Associates in Galena, Illinois, as he shared his thoughts on oil price and the ongoing conflict.
Supply concerns were aggravated after the United States and its allies announced that they would remove certain Russian financial institutions from the SWIFT payment system. This is a massive blow to the Russian economy as it makes it more difficult for its business and banks to access the global market, which also affects its oil buyers, which will now face new challenges regarding payments.
Rystad Energy Analyst Louise Dickson expressed her concern that the crisis in Ukraine and the sanctions implemented on Russia from the West will “keep the energy crisis stoked.” She predicts that oil prices will be “well above $100 per barrel in the near-term and even higher if the conflict escalates further.”
Global bank Goldman Sachs also predicted a significant increase in oil prices. It adjusted its one-month forecast for Brent crude oil to $115 per barrel from $95 a barrel. “The range of near-term price outcomes for commodities has become extreme, given the concern of further military escalation, energy sanctions, or potential for a cease-fire,” said Goldman Sachs.
Concerns continue to grow as peace talks between Kyiv and Moscow broke down, concluding without a cease-fire with delegates going back to their capital for “further consultations,” implying that the much-awaited peace treaty is not yet at hand.
Corporate Exodus in Russia
Several Western oil companies have announced plans to pull out assets from Russia, further adding to the pile of the country’s economic sanctions and fueling greater concerns over the price of oil.
In a press release dated February 27, British multinational oil and gas company BP announced that it would be pulling out its stake from the Russian oil giant Rosneft after three decades of operations in the country. BP has held 19.75% of Rosneft shares since 2013.
“Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region… We can no longer support BP representatives holding a role on the Rosneft board. The Rosneft holding is no longer aligned with BP’s business and strategy, and it is now the board’s decision to exit BP’s shareholding in Rosneft,” stated BP Chairman Helge Lund in a statement.
The move deals a significant blow to both Russia and the company as BP relies on Rosneft for approximately half of its oil and gas reserves and a third of its production capacity. According to BP, divesting its stake in the Russian company is expected to cost upwards of $25 billion.
In another loss of a large foreign investor, BP’s rival, Shell, stated that it would withdraw all of its Russian operations a day after BP decided to pull out. The company announced that it would cut off its 27% stake at the flagship LNG plant Sakhalin 2, which was a joint venture with another Russian gas giant, Gazprom (Ownership interests: Shell 27.5%, Gazprom 50%, Mitsui 12.5%, Mitsubishi 10%) according to its statement dated February 28.
“The Board of Shell plc (“Shell”) today announced its intention to exit its joint ventures with Gazprom and related entities, including its 27.5 percent stake in the Sakhalin-II liquefied natural gas facility, its 50 percent stake in the Salym Petroleum Development, and the Gydan energy venture. Shell also intends to end its involvement in the Nord Stream 2 pipeline project,” Shell said.
“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” said Shell CEO Ben van Beurden. “We cannot – and we will not – stand by,” he added, stating that their immediate focus is the safety of their people in Ukraine and supporting their people in Russia.
Shell held around $3 billion worth of non-current assets in Russia in 2021. The company stated that the move to part ways with Gazprom and related entities will “impact the book value of Shell’s Russia assets and lead to impairment.”
French oil and gas company Total Energies has condemned Russia’s actions towards Ukraine but has not yet announced any withdrawal of assets. It will, however, no longer provide additional investment for new projects inside Russia.
These moves underscore the increasing pressure of Western governments on their domestic corporations to cut down on operations and investment in Russia as the series of economic sanctions widens.
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