One year after Russia invaded Ukraine, energy commodity flows across the globe have shifted and prices have experienced extreme bouts of volatility.
Russian President Vladimir Putin's "special military operation" in Ukraine has met with widespread condemnation and many countries have since refused to do business with the world's second-biggest oil producer.
The Council of the European Union last year imposed a slew of sanctions against Russian companies and individuals in response to what it described as a "war of aggression against Ukraine."
In June, it adopted a sixth package of sanctions that prohibits the purchase, import or transfer of seaborne crude oil and certain refined oil products from Russia to the EU. The restrictions for crude went into effect on Dec. 5 and began on Feb. 5 for other refined petroleum products.
The EU also has imposed a price cap on Russian crude and refined products, which it says will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.
LPG export flows divert, natural gas prices stay volatile
Although Liquid Petroleum Gas was not included in the restrictions, Russian-origin supply to northwest Europe has all but disappeared since the invasion. LPG shipments from Russia have dropped to zero from a pre-war average of about 100,000 metric tons/month, OPIS data showed.
During the first few months following the invasion, Russian-origin LPG cargoes that would have landed in Northwest Europe were sent to such destinations as Albania, Turkey and India, according to OPIS ship tracking data. By the second half of 2022, shipments from the Russian Baltic port of Ust-Luga began to find a more regular home in Turkey, though at a lower rate than pre-invasion levels.
LPG flows into Turkey and other countries outside the EU have continued into 2023, as trade flows shift in response to the sanctions. Early indications suggest these re-routed flows are on the rise. Russian LPG exports are expected to rise by more than 70% to over 150,000 mt/month in February compared to January.
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Aside from LPG, natural gas prices in Europe were extremely volatile in the third quarter of 2022, after Russia began to curtail deliveries into Europe via the Nord Stream pipeline.
Nord Stream is a joint venture between Russia's Gazprom, which owns 51% of the pipeline, German oil and gas producer Wintershall DEA (15.5%), PEG Infrastruktur E.ON (15.5%), Dutch company N.V. Nederlandse Gasunie (9%) and ENGIE, which also owns 9%.
The twin pipeline system runs from Vyborg, Russia, through the Baltic Sea to Lubmin near Greifswald, Germany, where it connects with the European gas transmission system. The system has a potential capacity to move up to 55 billion cubic meters/year to Europe.
Gazprom began reducing natural gas flows in 2022, initially due to seasonal maintenance in July and August. The Russian oil and gas giant announced it was shutting the Nord Stream gas pipeline indefinitely on Sept. 5. European gas prices jumped in response to that announcement, with the front-month October Dutch Title Transfer Facility (TTF) gas futures rising more than 30% between 8:10 a.m. and 8:30 a.m. GMT to over €280 ($296)/MWh.
As a result, a group of European energy providers announced plans to increase storage capacity, to source product from other regions and reduce reliance on Russian supplies.
Tree Energy Solutions, E.ON and ENGIE are setting up a fifth Floating Storage Regasification Unit (FSRU) in Germany that will come online at the start of the heating season in 2023, the companies said in September. The FRSU will have an import capacity of about 5 bcm/year, or some 5% of Germany's annual consumption.
Buyers also continue to source gas cargoes from overseas. Rotterdam, Northwest Europe's biggest port, recently said LNG imports last year rose 64% from 2021, following the reduction of Russian supplies via the Nord Stream pipeline.
Russian refined oil buyers in Europe scramble to source product elsewhere
In liquid bulk markets, half of Europe's diesel supply was sources from Russia, before the Feb. 5 EU refined product embargo took effect. Consequently, many EU countries scrambled to boost stocks of the road fuel ahead of the ban.
Diesel exports across the whole of Russia to the EU jumped to 720,000 b/d in November and in December, or about 2.9 million mt/month, according to International Energy Agency data. That's compared to a more typical monthly average of 1.7 million mt in the first 10 months of 2022.
As a result, diesel and gasoil stocks in the northwest European trading hub of Amsterdam, Rotterdam and Amsterdam were roughly 55% higher year to year in the week ended Feb. 8, at about around 2.5 million mt, according to sources quoting data from Insights Global.
"The market is heavy at the moment," one diesel market source said. The outright price for barges loading in ARA, fell to $778.25/mt on Feb. 4, the lowest since January 2022, as the market was awash with product, predominantly from East of the Suez Canal, according to OPIS pricing and ship tracking data.
Gasoil inventories in the ARA hub reached the highest level since February 2021, following strong inflows of gasoil in the lead up to the EU ban, according to the same sources quoting Insights Global.
Northwest European naphtha buyers have also turned their backs on Russian-sourced product following the invasion. Consultancy Naphtha Information Services said Northwest European petrochemical companies last year cracked 3.4 million mt of Russian naphtha.
NIS has forecast that, because of the sanctions stopping Russian naphtha flows to Europe, Russian exporters are likely to re-route an additional 4.2 million mt of naphtha to Asia, mainly China and India in 2023, instead of Europe.
Buyers in the region will replace Russian cargoes by ensuring the bulk of Northwest European and Mediterranean naphtha that would be typically earmarked for export does not leave the region, the consultancy said.
Carbon may cool, but fossil fuels look hot
While the scramble to avoid reliance on Russian oil exports in Northwest Europe has spurred research and development into alternative energy sources, as part of the Fit-for-55 reforms -- the bloc's plan to cut greenhouse gas emissions by 55% by 2030 compared with 1990 levels -- the EU carbon market has also experienced extreme volatility since the invasion.
The price of European carbon emissions rapidly declined, as many institutional investors with an exposure to the market exited their long positions after the war broke out, according to Gregory Idil, a senior carbon emissions trader with Vertis Environmental Finance. This liquidation of long positions cut the carbon price by around 20% to a 19-week low, he said.
One year on from the start of the Russian invasion, the conflict remains a key factor in carbon market pricing for 2023, not only due to elevated natural gas prices and fuel-switching but through reforms that have recently been approved by the EU.
The OPIS Global Carbon Offsets Report along with the daily OPIS Carbon Market Report provide the largest compliance and voluntary carbon market price suite by any price reporting agency in the world. OPIS’s robust and comprehensive coverage of the carbon markets enables global project developers, traders, marketers and investors to accurately identify a fair value for their assets and understand compliance costs associated with carbon and emissions programs.
REPowerEU, the EU's energy security response to Russia's decision to cut natural gas deliveries, will enforce the sale of EU carbon allowances, or EUAs, from auctions that were scheduled to take place in the latter half of this decade. It's expected this should help cool prices that this month reached an all-time high with the December 2023 EUA benchmark breaching €100/mt.
Nevertheless, despite the growing influence and accelerating pace of the energy transition movement, one year after Russia's invasion of Ukraine, Big Oil is still big business. At the start of February, oil and gas major Shell posted 2022 earnings of $39.9 billion, the highest annual profit in its 115-year history. Shell expects global refining margins and refinery utilization to remain strong into 2023.
And analysts appear to agree. Global refined oil product prices will increase in 2023 and 2024 as supply remains tight and demand rises, according to a Feb. 21 report by investment bank Goldman Sachs.
--Reporting by OPIS Europe; Editing by Rob Sheridan, email@example.com and Jeff Barber, firstname.lastname@example.org
Each day, OPIS editors canvass the market for hard-to-track delivered premiums into ports across Europe. They also draw on exclusive shipping data for supply insight that covers import volumes into Europe, identifying key dynamics behind price changes. This insight and price transparency for the European spot middle distillates market is delivered daily in the OPIS Europe Jet, Diesel & Gasoil Report.