“Russia’s energy supplies are very much at risk, either due to being withheld by Russia as a weapon or swiped off the market due to sanctions,” Louise Dickson, senior oil market analyst at Rystad Energy, wrote in a report Monday.
Gasoline prices would go much higher
“It’s a wild card if Russia will actually slow those flows to try to inflict pain through commodities,” said Ryan Fitzmaurice, energy strategist at Rabobank. “If there are actual supply disruptions, that’s the trigger for meaningful price increases.”
To be sure, there is no evidence at this point that Russia is cutting off the world from its oil supplies. And the West has gone out of its way to carve out Russia’s energy industry from sanctions in the hopes of minimizing the market impact. Putin may very well decide this is one weapon best left unfired.
Russia needs oil revenue more than ever
Not long ago, it was viewed as very unlikely that Putin would resort to weaponizing oil.
However, the Russia-Ukraine crisis has escalated quickly, marking the worst fracture with the West since the Cold War. And Putin’s aggressive stance and comments have surprised observers, prompting some to question his mental stability and raising concerns about how he will respond to the latest sanctions.
‘I became very nervous’
Heartened by the fact that Russia has a long history of reliably supplying oil — even during the height of the Cold War — Natasha Kaneva saw little risk of the country weaponizing its oil exports. But Kaneva, the head of global commodities research at JPMorgan, is no longer feeling so confident.
The JPMorgan exec believes investors are underestimating the risk that Putin will weaponize oil supplies.
“The market does not need any disruption,” Kaneva said. “We don’t have any shock absorbers. The reaction in the price will be nonlinear.”
“Putin could seek to inflict significant pain on Western nations,” Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in a note to clients Sunday, “and commodity prices may feel the impact of his countermeasures.”
“I do think it’s an ongoing concern, particularly as the West responds to the aggressive action from Russia,” Sommers told CNN in a phone interview last week. “We would be concerned if he decided to cut off supplies. No matter what he does, the United States will continue to produce in this volatile political environment.”
White House has warned Putin not to weaponize oil
Putin does not need to turn the taps completely off to punish the West. Oil markets are so tight that just a modest decrease in supplies from Russia could have a large impact on prices.
“Even if Russia cut supplies by 10% to 20%, the price response would compensate Russia for the loss of supply,” said Rabobank’s Fitzmaurice.
“If Putin decides to weaponize his energy supplies, it would be a major mistake,” Daleep Singh, US deputy national security advisor, said on CNBC.
The Biden Administration official noted that Russia is “incredibly dependent” on the West as a consumer for its energy supplies.
“This is a long-term vulnerability for President Putin. If he weaponizes energy supply, that’s only going to accelerate Europe’s and the West’s diversification away from Russian energy,” Singh said, adding that it would be a “major gaffe.”