Crude Gains Evaporate as Russia Seen Too Big to Sanction: Energy

Oil traders are betting that Europe is too hooked on Russian fuel for the region to back energy sanctions against President Vladimir Putin.

After jumping as much as 3 percent on March 3, the most in six months, benchmark Brent crude is now below where it was last week. Europe probably won’t back oil and gas sanctions for Russia’s incursion into Crimea, an autonomous province in Ukraine, because of the economic damage it would cause, analysts at Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley say.

“Europe is too interlinked with Russia in terms of energy supplies to do anything,” Olivier Jakob, the managing director of Zug, Switzerland-based researcher Petromatrix GmbH, said by phone March 4. “We just import too much oil from Russia.”

Europe relies on Russia for almost a third of its supply of crude, natural gas liquids and refined oil products, according to 2012 data from the Paris-based International Energy Agency. Putin, president of the world’s largest energy exporter, said at his residence near Moscow on March 4 that Russia saw no immediate need to invade Ukraine. President Barack Obama said a day earlier the U.S. and its allies were preparing economic sanctions to show Russia that control of the Crimean peninsula will be “costly.”

Brent for April delivery was little changed today after falling yesterday to $107.76 a barrel, the lowest settlement in a month, on ICE Futures Europe in London. Brent closed at a two-month high of $111.20 on March 3.

Goldman Sachs said March 4 that Brent will average $100 a barrel in the next 12 months, the same as its estimate on Jan. 28. Bank of America forecast $105 a barrel on March 4, also leaving its estimate unchanged.

Travel Bans

The Obama administration restricted visas for Ukrainian officials and others, including Russians, who it says are threatening the sovereignty of Ukraine. President Barack Obama also authorized the imposition of financial sanctions, clearing the way for escalating pressure on Russia to resolve the crisis.

“We will put the maximum pressure on Russia to engage it to de-escalate,” French President Francois Hollande told reporters in Brussels today. “The pressure could include the use of sanctions.”

“Oil-related sanctions against Russia seem unlikely,” Francisco Blanch, head of commodities research at Bank of America in New York, wrote in a report March 4. “Europe cannot afford to relapse into the third recession in six years.”

Trigger Slowdown

Sanctions on Russian natural gas might raise prices in Europe by 35 percent to 40 percent, Goldman Sachs analysts led by Jeffrey Currie said in a report March 4. Central and Eastern Europe would be most vulnerable to supply disruptions, which may hamper industries reliant on the fuel, “possibly triggering a sharp slowdown or recession,” Citigroup analysts said in a report yesterday.

European members of the International Energy Agency imported an average of 4.4 million barrels a day of crude, natural gas liquids, refined oil products and other feedstocks from Russia in 2012, accounting for 32 percent of consumption, according to the adviser to 28 nations.

While EU members successfully imposed an embargo on oil imports from Iran in July 2012 to pressure the country over its nuclear program, their energy trade with Russia is almost eight times larger. The EU imported crude oil and natural gas from Russia valued at $156.5 billion in 2012, compared with $19.6 billion from Iran prior to the sanctions in 2011, according to the International Trade Centre’s Trade Map, a venture between the World Trade Organization and United Nations.

The U.S. is far less dependent, importing crude from Russia valued at $4.1 billion in 2012, Trade Map data show.

Western Sanctions

A lack of unity between the U.S. and EU would make sanctions on Russian energy far less effective than those against Iran, Barclays analysts wrote in a report March 4. Iran’s oil exports fell 60 percent to about 1 million barrels a day last year as a result of Western sanctions, according to the White House.

Russia also is unlikely to use energy as a weapon against Europe, its biggest customer. The country’s economy expanded 1.3 percent in 2013, the slowest pace since a recession in 2009, according to the Federal Statistics Service. Oil and gas sales account for more than half of Russia’s federal budget, data from the U.S. Energy Information Administration show.

“Russia needs every ruble it can get from large energy exports,” said Jens Naervig Pedersen, a commodities analyst at Danske Bank A/S in Copenhagen.

Southern Branch

Oil flows from Russia through Ukraine have continued throughout the crisis. The southern branch of the Druzhba pipeline is working normally, Natalya Kutsik, a spokeswoman for Russia’s oil pipeline operator OAO Transneft, said by text message today. The link carried about 300,000 barrels a day last year, according to data from Ukraine’s energy ministry.

Russian natural gas transit also was uninterrupted, according to OAO Gazprom, Europe’s biggest supplier. More than half of Russia’s gas exports to the EU are shipped via Ukraine, accounting for about 16 percent of the region’s demand.

While Putin said March 4 there was no immediate need to invade Ukraine, he reserved the right for military action to defend ethnic Russians in the region. U.S. Secretary of State John Kerry stressed the need for Russia to talk directly with Ukraine when he met with Russian Foreign Minister Sergei Lavrov in Rome for about 40 minutes today, according to a State Department official.

Concrete Outcomes

Discussions in Paris yesterday between Kerry and his Russian counterpart yielded “something concrete to take back” and discuss with President Obama, Kerry said, without elaborating. Lavrov earlier said that the threat of sanctions won’t change his government’s position. Crimea’s parliament voted in favor of joining Russia and will hold a referendum in 10 days time, according to a decision on its website today.

“The West would be equally affected if there are sanctions given Europe’s resource dependency on Russia,” said Miswin Mahesh, a London-based analyst at Barclays. “It’s just not possible to turn off the biggest energy exporter overnight.”