The dramatic events over the weekend in Russia served as a stark reminder to commodity traders of the risks associated with potential domestic upheaval and its impact on oil supply. Goldman Sachs’ commodity team delves into the history of supply shocks, the vulnerabilities of oil infrastructure, and the potential effects on oil prices in a Q&A format. While the failed coup may not have a significant impact on oil prices, it raises the probability of future disruptions or negative impacts on oil supply due to domestic volatility in Russia.
Key Points
1. Importance of understanding risks to Russia oil supply: The dramatic events in Russia over the weekend serve as a stark reminder of the risks associated with potential domestic upheaval and the impact it can have on oil supply. Commodity traders should be aware of these risks and their potential effects on oil prices.
2. Historical supply shocks: Looking at past supply shocks, it is evident that significant disruptions to oil supply have occurred due to domestic civil unrest or the destruction of key oil infrastructure in military conflicts. Understanding this history can provide insight into the potential for future disruptions in Russia’s oil supply.
3. Oil infrastructure risks and potential repercussions: Key oil infrastructure in Russia is located in the Baltic Sea, the Black Sea, and the East. While there are currently no disruptions to oil flows, the presence of the Wagner group around oil facilities in Libya and the potential for disruption in the Black Sea region highlight the elevated risk to oil infrastructure. This could have repercussions not only for Russia but also for other oil producers outside of Russia, such as Libya.
The recent dramatic events in Russia this past weekend have reminded commodity traders of the importance of understanding the risks associated with potential domestic upheaval and its impact on Russia’s oil supply. In response, Goldman Sachs’ commodity team has provided a Q&A format discussion addressing these concerns.
Firstly, it is noted that Russian oil output had quickly rebounded last summer after a temporary drop in the spring. Looking at historical supply shocks, it is observed that significant disruptions to oil supply typically arise due to domestic civil unrest or the destruction of key oil infrastructure in a military conflict. Currently, there is no disruption to oil flows, but it is worth highlighting that Russia’s major export hubs for seaborne oil are located in the Baltic Sea and the Black Sea, where the Wagner group also has a presence around oil facilities in Libya.
Goldman Sachs does not anticipate a major impact on oil prices from this failed coup, but market sentiment may price in a higher probability of future supply disruptions or negative impacts on oil supply due to domestic volatility in Russia. However, the impact may be limited as oil markets are often focused on spot fundamentals that have not changed, and any hits to financial risk sentiment or oil demand may offset the potential disruptions.
The Q&A section provides further details on the history of supply shocks, the risks to oil infrastructure, and the potential effects on oil prices. It highlights past instances of significant and persistent supply shocks, including the drop in Russia’s oil production following the dissolution of the Soviet Union and major geopolitical conflicts such as the Iranian revolution, the Iran-Iraq war, the Gulf war, and Venezuela’s civil unrest.
The implications for the probability of a significant and persistent decline in Russia’s oil supply are closely linked to the likelihood of major domestic civil conflict or military conflict leading to the destruction of oil infrastructure. Recent events and statements suggest that the perceived probability of significant domestic upheaval in Russia has likely risen.
In terms of oil infrastructure, Russia exports its seaborne oil from three main hubs: the Baltic Sea, the Black Sea, and the East. The oil-producing regions are concentrated in Central/Eastern Russia. Based on the location of the rebellion in the South and the presence of oil infrastructure in the region, there may be a relatively higher risk of disruption or blockade in the oil facilities around Rostov-on-Don and the Black Sea export ports.
There are potential repercussions for oil producers outside of Russia, particularly in Libya where the Wagner group has a presence around oil facilities. While the Wagner group has the capability to disrupt oil production, the incentives to do so remain unclear given the dependence on revenue from these flows. However, there have been previous instances of blockades in Libya, which have the potential to significantly impact production.
Regarding the effects on oil prices, markets may price in a moderately higher probability of supply disruptions or negative impacts on oil supply, which could put upward pressure on timespreads and long-dated oil prices. However, the impact on oil prices is expected to be limited due to the focus on spot fundamentals that have not changed. Additionally, factors such as potential adjustments by OPEC and increased uncertainty leading to reduced oil demand may provide offsets.
Overall, while the developments over the weekend may increase uncertainty in the geopolitical global environment and support a shift in focus to energy security, it is still too early to confidently identify any long-term effects on oil prices.
