Since its outbreak in February 2022, the developments of the Russian-Ukrainian war have garnered close attention from energy market analysts and observers. This diligent monitoring aims to assess its potential ramifications on oil and gas supplies for international markets. At the onset of the war, oil market dealers placed their bets on the perpetuation of soaring crude prices with limited supplies, attributing it to the anticipated decline in Russian oil production caused by stringent Western sanctions targeting Russia's economy. However, this turned out to be a losing bet, as Moscow redirected most of its oil exports towards consumption markets in Asia instead of Europe.
As a result, oil prices have slowed since breaking through the USD 130 barrier in March 2022, falling to less than USD 75 currently. However, recent events have reignited speculation about the potential resurgence of rising oil prices. This came in line with the Russian military Wagner Group, led by Yevgeny Prigozhin, staging a rebellion against the Russian regime on June 24, before being swiftly quelled. Despite its setback, some perceived this rebellion as a harbinger of internal shifts that Moscow might encounter in the near future, possibly posing risks to Russian oil supplies.
Moscow’s Policy
Following the outbreak of the Ukrainian war, the Russian oil production and export policies gained considerable attention from the oil community due to its clear impact on market fundamentals. Initially, traders counted on the sustained momentum of Brent crude prices, which soared to more than USD 130 per barrel in March 2022, a USD 30 per barrel rise from last February. However, those bets were not met due to Russia's new oil export policy, as evidenced by the following:
1. Russia’s oil production:
Observers questioned Russia's ability to guarantee the stability of oil output at the start of the Ukrainian war, especially with the European Union banning Russian energy products and then placing a price ceiling on them. However, Russian oil output was only moderately impacted, and Moscow pumped approximately 9.45 million barrels per day of crude oil in May 2023, with little change from the previous year's supplies.
2. Russian oil exports:
The European ban on Russian energy products raised some experts' belief that Russian energy exports would fall dramatically in the short term. This did not occur as Moscow shifted oil supplies to Asian consumption markets rather than European markets. According to the International Energy Agency, overall Russian oil exports (crude oil and refined products) were around 7.8 million barrels per day until May 2023, remaining stable from 2022. It should be noted that China and India accounted for more than half of Russian exports during this month.
3. Coordination with “OPEC+”:
For the past eight years, Moscow has forged a productive relationship with OPEC to ensure oil market stability through a production cut policy. Nevertheless, the two parties' cooperation was put to the test after the outbreak of the Ukrainian war, as Moscow sought to pump large amounts of crude oil to compensate for the decline in its exports to Europe and the decrease in the price of its main crude, "Urals," due to the European price ceiling.
It has become difficult for the "OPEC+" alliance to assess the Russian compliance with the production cuts it has pledged. This is a result of Russia's policy of withholding oil production data, which culminated in issuing a government decree prohibiting the Russian Federal Statistics Authority from publishing crude oil and condensate production for a period of 12 months until April 2024. Regardless, there continues to be collaboration between Russia and OPEC since they both need each other to avert a broad price war.
A New Threat
The worst-case scenario for energy markets would have been a lengthy Wagner Group insurgency, followed by a military escalation that would have damaged Russia's oil infrastructure, perhaps disrupting crude supply to international markets. However, this did not occur, and the significant risks to the global oil market disappeared.
The escalation in Russia was rapidly reduced, and Wagner forces withdrew from the strategically important city of Rostov. This is due to the mediation efforts of Belarus President Aleksandr Lukashenko, known to be close to Russian President Vladimir Putin. This means that the oil market won’t be strongly affected by the recent crisis, or at the very least, its impact will remain very marginal, especially given the lack of any warning indicators concerning Russia's political and military situation.
By the end of the session on Monday, June 26, Brent crude contracts had increased by less than half a dollar from the previous Friday's session to USD 74.3 per barrel, reflecting the absence of any direct risk to crude oil supplies in the short term. In this regard, the Norwegian company "Rystad Energy" believes that a large increase in oil prices is unlikely because of the recent "short-term event," but it affirmed that geopolitical risks have increased owing to internal Russian instability.
Accordingly, traders in the oil market will finally treat the Wagner rebellion as another geopolitical threat to the Ukrainian war, which could represent a factor in future oil price increases if the Russian internal situation shows any new negative indicators. According to some, Russia's quick rebellion is just a prelude to an increase in internal tensions, which could impose constraints on the path of production and export of its oil. Others, perhaps more likely, indicate that the Russian interior will show greater cohesion in the coming period, in a way that will ultimately support Moscow's aspirations to increase its oil exports to support its economy and strengthen its military position in the Ukrainian war.
A Growing Anticipation
In any case, Russia's domestic developments will be keenly followed by its biggest allies, particularly China and India. It seems premature however for both countries to reverse their positions and cease buying Russian oil. Yet, Beijing or New Delhi will view Wagner's rebellion as an indication of their partner's weakness, and this opportunity can be exploited to gain political and economic advantages, such as securing Russian oil shipments at lower prices.
On the other hand, a note issued on June 25 by the Canadian RBC Capital Markets bank indicates that the US administration has been in contact with key domestic and foreign producers to secure market supply in the case of a drop in Russian oil output as a result of recent developments. In light of the absence of direct threats to Russian oil supply, this looks to be a premature hedge by Washington, but it reflects a degree of uncertainty caused by Wagner's armed insurgency and its prospective implications on the global oil market.
The strong cooperation between Russia and "OPEC" is likely to continue within the framework of the "OPEC+" alliance. This is due to both parties' interests to reinstate the production ceiling policy to support market stability and improve oil balance. Nonetheless, OPEC will closely monitor recent developments in Russia, anticipating any developments that may alter not only Russia's production policy, but also the overall objectives of the "OPEC+" alliance.
To summarize, the impact of the Wagner Group rebellion on the oil market has appeared insignificant thus far, especially with no signals of a threat to Russian oil supplies. However, global oil traders will not be able to ignore what transpired since internal changes in Russia, as well as its oil infrastructure and policy, will be closely monitored by investors, exporters and importers of oil throughout the world.
