Oil And Gas Market Volatile, Petrochemical Market May Follow Suit If Invasion Prolongs

On 24th of February 2022, Russia invaded neighbouring Ukraine under the garb of existential crisis. Russian forces have opened three-front war on Ukraine, troops and tanks have been entering from Donbas, Belarus and Crimean Peninsula. Certain anticipated implications have manifested rather instantly where crude oil prices have breached USD 100 per barrel while stock markets have nosedive globally.

These developments will not only lead to regional instability but also have global ramifications. Consequently, West has also started imposing economic sanctions and other reprisals on Russia for “illegally” invading Ukraine. Major western powers including USA, EU, UK, Canada and other nations have imposed heavy financial sanctions and export controls in order to isolate Russia from global financial system.

Impact on Oil and Gas and their derivatives

Repercussions of Russia-Ukraine war are likely to appear on global convertors’ margins, as crude value has already started hampering their margins. However, key players in Asia and Middle East including ONGC and SABIC shall reap some short-term benefits post steep escalation in price of global crude oil value. ONGC, being the largest oil producer in India, owing the largest share of oil rigs in the country will be benefitted after sudden increase in global crude oil prices. Similar scenario is expected from Middle Eastern giant SABIC, which will also gain in the short term. Meanwhile, global converters are highly concerned from these spiralling crude value, as the demand fluctuations are highly price sensitive amid stable domestic or regional consumption levels. Consequently, they will have to curtail their margins margins.

On the other side, Natural gas prices are also going to be a major setback for importers, as major import dependent nations like India, Japan, South Korea and European nations like France, Belgium and Germany will suffer with high upstream values. Global refiners’ margin is going to be shortened by dual drawbacks as refineries running on natural gas will again suffer with high energy cost, while crude oil is already an existing factor. Furthermore, immediate downstream derivative like Naphtha shall gain momentum, which will eventually cut margin of propylene and ethylene manufacturers. However, refiners having dual feed cracker like OPAL in India may remain uncertain about feed, as market is expecting steeper price escalation for Naphtha than LNG in forthcoming months.

Impact on Trading Activities

Trading activities are likely to get adversely impacted as Black Sea form strategic location for trading of key commodities across the world however recent invasion has placed it as the theatre of war. This is expected throw in speculations around passing of trading vessels in the Black Sea region.

Fertilizers including Ammonia, Potash and others have been among heavily exported commodities globally from Black Sea region. Fertilizers are yet to stabilize globally, and anticipated supply disruptions are likely to further test global supply value chains. Consequently, it won’t be a surprise if fertilizer market observes another round of price increase in coming weeks.

Meanwhile, Russia and Belarus export several other key commodities to the world where elastomers and petrochemicals form the key baskets of trade. Polybutadiene rubber, Nitrile Butadiene rubber, Nylon-6, Caprolactam are few among whole range of petrochemicals and elastomers. These products may also observe volatility given that war escalates into something catastrophic and endured for significant amount of time.

Canada has been swift in its reprisal approach and has cancelled Russian export permits amounting USD 700 million. Aerospace technology and mineral goods are among key commodities that will not be sent to Russia from Canada.

Russia is also a key importer of several key products including polymers, pharmaceuticals and petrochemicals. Imports of polymers and petrochemicals into Russia may also weaken as trading activities may get hampered. Pharmaceutical is highly import dependent and recent invasion may curtail German pharmaceutical imports given Germany impose trade restrictions.

Repercussions of Sanctions on Russia

USA, EU, UK, and Japan are among the key nations that have imposed sanctions on Russia for invading Ukraine. As per latest updates, Sanctions are sizable and long term in scope which may slow down the growth of Russian economy. Ruble, currency of Russia, has also taken a serious hit as Russian stock market slide since the beginning of invasion, this is likely to keep the investors cautious and may lobby Putin administration to halt invasion given the war stretches.

Invasion has been openly condemned and criticized by the West and sanctions have been imposed with immediate effects. Oil and gas market has already shown signs of volatility as both natural gas and crude oil prices have skyrocketed. It has been expected that crude prices may shoot up marginally. Crude oil conglomerates may garner some short-term gains from these uncertain times however long-term volatility would be detrimental for both oil producers as well as downstream petrochemical manufacturers. Hence, it has been highly recommended that the invasion should be halted with immediate effect limiting loss of life and property. This will not only be geopolitically and economically prudent but also show humanitarian values.