Here’s something I thought I’d never be discussing in regards to our oil investments:
What if Ukraine wins it’s war against Russia?
My previous most likely analysis in Ukraine was that either Russia would ultimately defeat and subjugate Ukraine, or that the war would be fought to some sort of standstill, with some part of the Donbas negotiated as a Russian satellite. I thought we’d see a long, drawn out ‘cold war’, with the West applying continuing pressure of sanctions – something Putin is hardly unused to — and Russia alternately trying to bully the EU using Russian natural gas and oil supplies.
Something like this could still be the outcome — I don’t for a moment suggest that the recent military victories for Ukraine are the ‘beginning of the end’ for Putin in Ukraine. And here in the US, there remains the possibility that Trump could run again for President and win and almost certainly abandon Ukraine support outright, as crazy as that sounds.
But what happens if Ukraine just outright WINS, pushing Russian troops back beyond Ukrainian borders and forcing them to just high-tail it home?
I have been thinking a lot about this for the first time, and we have to consider this now as a possible outcome, in light of recent military successes for the Ukrainian army near Kharkiv.
Before this week, I saw the long-term effect of a Russian victory or partial standoff to lead to a permanent break-up of the global oil supply chain into two independent ‘realms’ — in essence creating two almost independent markets. In one of these markets, oil and gas would be supplied from and for “Democratic” countries (for lack of a better word), comprising the US, Europe and I expected most of the OPEC nations, including the most important Saudi Arabia. The second, “Authoritarian” market, would comprise Russia, China, India and perhaps Iran as it’s leaders. This idea of a binary, non-integrated global supply chain would be a paradigm shift for oil never before seen and so fascinating an idea that I am (was) considering writing a book on its so-far fledgling development and many possible long-term energy consequences.
I am fairly convinced that this kind of bifurcation of the current oil market, if it happens, would naturally portend a long period of supply constraints both in the West and the East, and a competition for energy resources the likes of which I think we have never seen before. From a supply perspective, Exxon, Shell, BP and Equinor have abandoned tens of billions of dollars of investment in Russia, isolating Putin from Western technology and financial markets. From the Russian side, we are only beginning to get a taste of the tremendous supply strain developing in Europe, with the shutdown of Nord Stream and further threats from Russia to end oil exports to Europe unless sanctions are relieved. But Europe is only at the point of the spear of Russian supplies, and the long-term consequences of disrupting the 2nd largest single supplier of oil and gas on the global energy balance is yet to be seen. We’ll unfortunately get a better taste of it as winter approaches, and Europe’s crisis deepens. That supply imbalance will also broaden rather quickly if this split in the markets widens over the next few years.
You might get a sense of why I’ve been so outrageously bullish on oil and gas in recent months, despite the already significant rallies of both fuels this year.
But what changes in this scenario if Ukraine wins? Will the energy supply imbalance get worse? Or, will they be avoided as markets go back to where they were before the invasion?
This is so difficult to predict, but I think the first result of an outright Ukrainian victory would be the ouster of Putin as the leader of Russia. How long this might take after a Russian defeat is difficult to know, but the public Russian protest voices against the aggression in Ukraine are growing louder, as the defeats in Ukraine multiply. Financially, US and EU sanctions and the slowdown of Russian oil and gas exports to Europe have had a debilitating effect on the Russian treasury. Russia has to date lost a potential $90b in European oil and gas sales, and analysts think Putin’s war chest could be at serious risk of being emptied by the end of the winter. If the war continues towards complete defeat, most Russian experts don’t believe Putin can survive.
For our oil and gas markets, that would put Russia’s enormous fossil fuel supplies in other hands – but whose hands? Would Putin be replaced by another authoritarian or perhaps there would be a new round of glasnost/perestroika? How long a period of terror and chaos might precede a change of power in Russia? How badly would energy production and outflows be curtailed and by how much?
I am no Russian political analyst, that’s for sure – but I can guess there’d be a substantial period where oil and gas assets would be constrained from production and transport in ANY direction, whether to the West or the East. If Russia’s potential new leadership tries to move the country towards Western compliance, it is possible that we could see a full reinstatement of global energy markets and a rapprochement between Western oil and gas companies and their Russian partnerships. That’s also a very interesting idea, but with folks like Exxon currently in the middle of a lawsuit against Russia, looking to complete the sale of their abandoned Russian assets, going back to the ‘status quo ante bellum’ that served them so well for decades would seem a fairly long and difficult road as well.
In all cases, Putin’s political fall would be the biggest geopolitical event in the oil markets since the Gulf War in 1990, likely causing years of energy market uncertainty and disruption.
I don’t know what is going to happen, no one does. But we need to make sure we understand the possibilities and how they might affect our energy investments. There has never been a time when we have needed to be aware of the politics of oil, both here and in Europe more than right now.
While oil and gas are truly at the leading edge of the most volatile investments currently available to the retail investor, they also represent to me by far the best opportunities to generate very significant returns in the coming years, if handled correctly. The events in Ukraine only make the oil and gas markets more unpredictable and difficult to navigate then they already were, but to me also represent a generational opportunity.
