How the Russia-Ukraine war could impact energy markets

On February 24, 2022, eight years of build-up and turmoil came to a head when Russia invaded its neighbour Ukraine, flaring up a war in the making since 2014.

The West's response was nearly unanimous: many chose to slap economic sanctions on Russia specifically designed to target the richest and most powerful in a bid to dissuade Putin and his followers from instigating a full-scale war.

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Before the invasion, Europe was in the midst of an energy crisis ongoing since October which had often been blamed on Russia shorting supply in a bid to get the Nord Stream 2 pipeline approved for use, which could allow the nation to supply Europe with natural gas while circumventing Ukraine.

The two had a deal that meant Ukraine was awarded transit fees for gas travelling through the country.

There were concerns the pipeline could undermine Ukrainian sovreignty, and President Volodymyr Zelensky warned Russia may use the pipeline as a geopolitical weapon at a meeting with former German Chancellor Angela Merkel, while she was on her final official tour.

With Russia supplying 40% of the EU's natural gas, there are concerns the conflict could worsen the energy crisis that has already seen prices soar. Germany maintained that a trade relationship with Russia maintained peace, which is facing severe tensions.

UK Prime Minister Boris Johnson warned Europe should wean itself off Russian natural gas - primarily to loosen Vladimir Putin's grip on European politics - when announcing the first wave of sanctions against the country shortly after the invasion.

However, Russian and Ukrainian forces are expected to parlay at a venue in Belarus, although Zelenskyy has expressed scepticism.

It is very likely that being cut off from Russian gas will exacerbate the energy crisis. Several solutions have been proposed, such as increasing the supply of liquefied natural gas and alternative fuel pipelines to hastening the green transition.

Just as the pandemic appears to be ending and hopes of a return to normalcy loom, the invasion has caused markets to fall into further turmoil. Russia's invasion of Ukraine has sent energy prices soaring and could lead to unstable markets and energy fluctuations likely not seen since the annexation of Crimea in 2014.

The UK government seem to have been anticipating an invasion for a few weeks and have warned that it could have serious impacts on energy prices. The average household energy bill has already nearly doubled since last winter, leading to a 54% price hike from April, according to Ofgem.

However, it is not just natural gas that remains under threat by the Russian invasion.

"The escalation immediately jeopardises up to 1 million barrels per day (bpd) of crude supplies that transit through Ukraine and the Black Sea, but the long-term disruptions could be far more significant", Rystad CEO Jarand Rystad issued in an emailed statement.

"Our simulations show that oil prices could surge to around $130 per barrel, with consumers feeling the squeeze at the gas pump and in their power bills. The reality is that significantly higher prices are on the horizon in Europe and overseas.

"A complete halt to gas exports from Russia is highly unlikely, but gas piped through Ukraine – which represents 8% of European supply – is very much at risk. Russian gas accounts for over 30% of Europe’s demand, and other potential supply sources are inadequately prepared to bridge the gap.

"On the other side, Russian gas exports bring in more than $300 million for the Kremlin each day – revenues they cannot afford to lose. Germany’s suspension of the Nord Stream 2 pipeline further complicates matters and increases the pressure on the continent to look for other sources to replace those volumes", he added.

Read more: Breton: Nuclear will play "fundamental role" in EU's energy transition

Rystad maintains that a war between Russia and the West "remains unlikely", but deep economic consequences are almost inevitable, he stated.

"Russia cannot win an outright economic war, but it does have a major weapon to wield – oil and gas exports. Demand for oil and gas in The West is only rising, and a global energy crisis is likely to unfold", Rystad concluded.

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