Sanctions 2.0

The Real Worry for Oil Prices Isn't Missiles Over Syria

Supplies would survive. Sanctions against the oil industries of Iran and Russia are another matter.
Photographer: Al Drago/Bloomberg
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Rising geopolitical tensions in the Middle East have already boosted oil prices and there is plenty of scope for them to move higher still. That an oil price spike would follow Western missiles launched at Syria seems a foregone conclusion. But for prices to really keep moving higher, the U.S. would have to take serious action against Syria's key sponsors: Russia and Iran.

Going, Going, Gone

Syria's oil production collapsed shortly after the start of the civil war that has gripped the country since 2011

Source: Bloomberg, PIW

Any form of attack on Syria should have little or no physical impact on oil supplies. Syria hasn't exported any since the start of its civil war in 2011. To keep the country running, Iran has been delivering around 50,000 barrels a day of crude to Syria's Banias terminal, according to Bloomberg tanker tracking.

As I have written recently President Donald Trump already has Iran in his sights. The clock is ticking -- May 12 is the deadline for him to extend the waiver on sanctions that are suspended by the nuclear deal.

More recently he has turned up pressure on Moscow with a new raft of sanctions aimed at individuals and companies close to President Vladimir Putin. Gazprom PJSC CEO Alexey Miller and Surgutneftegas General Director Vladimir Bogdanov were among the targets -- but not the companies they run.

Perversely, those sanctions have given the Russian oil sector quite a boost. The income from oil exports has surged. The ruble value of a barrel of Brent crude rose 14 percent since before the sanctions were announced, and reached a record 4,498 rubles ($72) on Wednesday. When Brent peaked at $146.08 a barrel in July 2008 the equivalent price was just 3,435 rubles a barrel.

Surging on Sanctions

The ruble value of crude soared to a record after U.S. sanctions boosted oil prices and hit Russia's currency

Source: Bloomberg

Note: Brent price converted to rubles

With most of their costs denominated in the local currency that is a nice little bonus for the oil companies, and it's no surprise their shares are higher since the start of the year. The same is not true of aluminium producer United Co. Rusal -- one of the sanctions' primary targets -- which is down around 50 percent. 

Protected Species

Russia's oil companies shrugged off the latest round of U.S. sanctions that hit its main aluminum producer

Source: Bloomberg

Note: Share prices on MICEX indexed to 2017 close

The question is whether this good fortune can continue. Putin may calculate that a ban on conducting business with Russian oil companies would cause too much disruption to global oil markets to be worth worrying about. He might be right.

Russia exports around 4.5 million barrels a day of crude oil and another 3 million of refined products, according to government data. That is more than every OPEC member except Saudi Arabia. Around a quarter of Russia's crude exports go to China, according to that country's customs service, mostly by pipeline across their common border, or via Kazakhstan.

Sanctions aimed at Russia's oil sector have, so far, avoided hitting current production or exports, instead targeting investment in future output. They have halted Western companies' involvement in Arctic, deepwater and shale projects in Russia and were extended last year to include similar projects around the world where Russian companies hold more than a one-third stake.

But new restrictions could always target a single company, or a small group of companies. The most obvious target might be Rosneft PJSC, long seen as inextricably linked to the Kremlin.

It may have some defenses. The volume of its supply to the international oil market could provide an effective shield. So, too, the fact that BP Plc, the Qatar Investment Authority and Glencore Plc are its biggest shareholders after the Russian Federation, with a combined holding of 39.25 percent. 

Even so, sanctions aimed at Russian oil companies can't be ruled out. If they come, they could well come quickly -- the element of surprise certainly boosted the impact of the April 6 measures. 

If so, the timing would not be ideal. Global oil supply has already been tightened by the OPEC-led supply cuts, and boosted by the collapse in Venezuelan output and drop in Mexican production. The group is nearing "mission accomplished" in draining excess oil inventories according to the International Energy Agency. 

Unintended Cuts

Falling production in Venezuela and Mexico has taken their output far below the levels they pledged

Sources: Bloomberg, PIW

Note: Production relative to level pledged under OPEC/non-OPEC output deal. No data for Mexico's March 2018 production

Good news if you're Saudi Arabia, or a shale oil producer. Bad news if you're a car driver, an oil-importing developing country, or just about anybody else. I'll be greasing the chain on my bicycle this weekend.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Julian Lee in London at jlee1627@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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