A Year On From The Invasion

^{Authored by Simon Flowers, Chief Analyst and Chairman at Wood Mackenzie.}

Russia’s war has had a huge impact outside Ukraine, particularly for the global energy markets. Soaring prices and supply chain disruption have led to a fuel affordability crisis in many countries and fed the inflation that’s dragging down the global economy.

One year on, here are our thoughts on how the war has changed energy markets:

1. Energy supply will no longer be taken for granted. No country can ever again allow itself to become reliant on imported energy from a single supplier. In future, energy security will be about the diversity of fuels and sources, and the primacy of domestic resources. Because of the war, all energy importers have accelerated in this direction.

2. Europe can live without Russian gas. The global market has adapted remarkably quickly. High prices dampened demand in Europe and Asia and pulled what supply was available into the European market – limited volumes of alternative pipe gas and every cargo of flexible LNG from around the globe. There’s growing confidence that Europe can muddle through the next three years, albeit with relatively high and volatile prices. New supply volumes, mainly US and Qatari LNG, arrive from 2025, helping prices to ease back to ‘normal’. Longer term, LNG growth is still all about Asia. The war, though, has fundamentally changed the market forever – it’s now a more global market, flexible and fungible, but likely more volatile as Europe competes with Asia for the same LNG cargoes. Could Europe buy Russian gas again in the future? Maybe, but it will be a long time, require regime change and, even then, in our view no more than 15% of its needs.

3. Oil and coal’s resilience. Despite ever-tightening sanctions, governments have been forced into expediency to keep the lights on and economies ticking over. Russian exports of both oil and coal have continued to flow at close to pre-war volumes. The appetite for its crude and oil product exports (albeit from different buyers) has helped Russia, which delivers 10% of global oil supply, to maintain its domestic oil production close to the levels of a year ago. We expect sanctions to take their toll over time, however. Oil prices, after spiking in the early months after the invasion, have fallen all the way back to below pre-war levels, suggesting the global market is currently adequately supplied. Global refining, in contrast, has been significantly disrupted. Discounted Russian oil exports were forced away from Europe, mainly to China and India; and products are now undertaking the same re-shuffling but to different markets. The resulting friction in crude and refined product trade, shipping logistics and refinery flexibility is reflected in historically high refining margins that will ease later this year as new capacity comes online.

Read full insight from Wood Mackenzie’s Simon Flowers.