💸 When US-led Sanctions Backfire
Crude prices jumped nearly 6% on Friday, posting their highest daily percentage gains since April. Front-month Brent rose 5.7% to $90.89/barrel, while Front-month WTI climbed 5.8% to $87.72/barrel.
Friday’s gains were dominated by the escalating situation in the Middle East, as Israel broadcasted its preparations for a ground-based invasion of the northern Gaza region. Friday’s supply-side dynamics were amplified after Thursday’s reports of the first US sanctions imposed on tankers carrying Russian oil above the G7 price cap of $60/barrel.
Today’s Energy Shots expands on the second-order consequences of US-led sanctions on Iran, Venezuela, and Russia as the conflict in the Middle East unfolds. Part 1 reviews the global implications of Western policymaking in a misguided echo chamber. Part 2 highlights the forward-looking supply-side risk caused by G7/US sanctions in the context of the evolving Middle East conflict.
Part 1: Chinese Beneficiaries
Last year, the US and other G7 nations responded to Russia’s invasion of Ukraine with short-term problem-solving. To G7 officials, the apparent solution to the Russia-Ukraine conflict was to target Russia’s key revenue driver, energy exports, with price caps and embargoes. I.e., less oil and gas revenue means less funding for the invasion. Unfortunately for policymakers, decisions aren’t made in a vacuum.
Here are the two fundamental miscalculations:
Firstly, Russia has its own interests to attend to. Moscow responded by adjusting its export strategy to circumvent sanctions while expanding its reach into new markets.
Secondly, the G7’s sanctions added to US-led sanctions on oil exporters Iran and Venezuela – both of which had already established new export routes via untraceable ‘shadow fleets’ to bypass sanctions.
As a result of those miscalculated sanctions, Western officials inadvertently subsidized the rerouting of global energy supply networks in favor of the China-Russia “no limits partnership” struck in February 2022.And without question, China has emerged as the ultimate beneficiary of G7/US policymaking. Since January, the country reaped roughly $10 billion in savings on sanctioned oil imports at the expense of rising energy costs in Western countries.
In the first nine months of 2023, China imported a record of 2.765 million bpd of sanctioned seaborne crude deliveries from Russia, Iran, and Venezuela.According to a US State Department spokesperson, Russian price caps enable buyers to “drive a harder bargain” and limit Russia’s oil revenues. According to a US State Department spokesperson, Russian price caps enable buyers to “drive a harder bargain” and limit Russia’s oil revenues. But there are two issues with the US stance on price caps:
- Russia’s oil discounts are short-term and narrowing
- Until Thursday, the US didn’t impose sanctions on price-cap violators
In the long run, Russia cuts ties with unfriendly European countries while strengthening its economic relationship with strategic allies like China.
Russian President Vladimir Putin travels to China this week to meet with Xi Jinping at the Belt and Road Forum. The heads of Russian energy giants, Gazprom and Rosneft, are joining Putin in China – a signal of Russia’s intent to expand the countries’ energy partnership.
Part 2: The Policy-Driven Supply Crunch
Here are the key considerations for crude markets in light of the Israel-Hamas conflict:
- Will the US enforce sanctions on Russia or Iran?
- The US v. energy inflation
- Western energy policy handcuffs non-OPEC+ production
- US Strategic Petroleum Reserve tapped to lowest level in ~40 years
This week’s Energy Shots expands on the argument against “peak oil” and why non-OPEC production is ill-prepared to respond to events like the conflict in the Middle East.
Our October 1st report highlighted the consequences of the US fight against energy inflation. The summary:
- Crude supply-side dynamics are in the driver’s seat
- The Fed sees rising fuel prices as a signal for more monetary tightening
- High cost of capital disincentivizes new oil and gas production
- Less production worsens the supply deficit, sending fuel prices higher
Our October 8th report highlighted the Biden administration’s disregard for the Energy Hierarchy of Needs. The summary:
- Anti-fossil fuel energy policies handicap oil and gas production in US and Canada
- Subsidized renewables aren’t capable of providing affordable, reliable, and secure energy (yet)
- Growing energy demand from the 7+ billion people in underdeveloped countries outweighs demand-reductions from the 1 billion in the world’s wealthiest countries
This week, global oil markets have a new threat with which to contend:
How will the US enforce sanctions if the Middle East conflict expands to Iran?
Earlier this year, US officials privately acknowledged taking a ‘softer’ approach to enforcing 2018 sanctions on Iranian oil exports. At the time, officials argued that “barrels are barrels,” and any supply to offset OPEC+ cuts was necessary for keeping fuel prices down while targeting Russian oil revenues.
By May 2023, estimates of Iran’s oil exports on sanction-circumventing “shadow vessels” reached roughly 1.6 million bpd. If Iran is found complicit in the Israel attacks, or if the conflict expands to include Iran, the US’ argument for soft enforcement won’t play. That puts policymakers in a bind.
They can start enforcing sanctions on Russia – the first of which occurred this Thursday on two cargoes. Or they can enforce sanctions on Iran. Both options result in reduced global supply and higher energy inflation.
Can the US tap into reserves again?
Since January 2021, the Biden administration has authorized four record-breaking releases from the US Strategic Petroleum Reserve (SPR), drawing the US stockpile down from over 600 million barrels to a ~40-year low of 351 million. After last year’s largest-ever release of 180 million barrels, the Administration will likely face more barriers to flooding supply in the event of a broader Middle East conflict.
⚡Weekly News Recap:
🛢️ Canadian Supreme Court Rules Against Impact Assessment Act (IAA)
On Friday, Canada’s Supreme Court ruled against the federal government’s Impact Assessment Act (IAA). The IAA, passed by PM Trudeau’s government, granted federal authorities the power to cancel natural resource projects based on environmental impact reviews.
The Supreme Court’s ruling gives more power to provincial governments to invest in energy sector development projects, such as oil and gas projects in Alberta.
The takeaway: The SC’s ruling reduces barriers to Canadian oil and gas production.
💸 Biden Administration Grants $7B to Hydrogen Hubs
This week, the Biden Administration announced the recipients of $7B in federal grants to develop seven regional hydrogen hubs across 16 states. The administration has a clean hydrogen production target of 10 million metric tons by 2030 and 50 million metric tons by 2050.
The allocation of funds:
- Mid-Atlantic Hub (PA, DE, NJ): $750 million
- Appalachian Hub (WV, OH, PA): $925 million
- California Hub: $1.2 billion
- Gulf Coast Hub (TX): $1.2 billion
- Heartland Hub (MN, ND, SD): $925 million
- Midwest Hub (IL, IN, MI): $1 billion
- Pacific Northwest Hub (WA, OR, MT): $1 billion
🍃 New York Rejects Offshore Wind PPA Adjustments:
On Thursday, the New York Public Service Commission rejected requests from offshore wind developers Orsted, Equinor, and BP to increase their contract-guaranteed energy prices.
🔐 Finland Tightens Security Around LNG Port
On Friday, Finland restricted access to parts of the Inkoo port that receives LNG imports following last Sunday’s damage to the Balticonnector pipeline. The Balticonnector gas pipeline connects Finland and Estonia. Seismologists reported blast-like waves in the area on Sunday. Investigators have not ruled out sabotage.