Nordea
analyst Thina Saltvedt is out with a note on the impact of the crisis in the
Ukraine on oil and its potential to send the EU back into a recession.
Thina
says “memories have been awakened of episodes in 2006 and 2009 when
Gazprom halted all Russian gas flows through Ukraine, amid pricing disputes,
completely cutting off supplies to Southern Europe and partially other European
countries.” The kicker is that since the
oil market has minimal back-up capacity, Euro oil inventories are low and there
is no real substitute in the transportation sector for oil and a halt from
Russia “will spark a sharp spike in oil prices and in a worst case scenario an
oil crisis”. Bear in mind also that
year-end oil supplies of the OECD members were at 10-year lows.
Consider also that imported gasoline
from Russia to EU adds up to “about 620k b/d, or 69% on a net basis”, which
means EU is pretty dependent on Russian oil.
“…refined product exports to Europe
increased by around 15% (130k b/d) in 2013 and this trend is expected to
continue”.
Saltvedt lays out Three Scenarios (2
weeks, 2 quarters, 2 quarters and beyond):
Scenario 1:
A short-term halt to oil deliveries lasting only two weeks, pushing oil prices
up by 10-20% (from Q1 average at USD 108/barrel).
Scenario 2: one-half of Russian oil supplies to Europe is
locked in, but this time for two quarters. Global spare capacity will fall to
lows last seen in 2008 to 2.2% of global demand from the current 3.9%. We
expect that Saudi Arabia’s spare capacity will compensate for some of the
losses, but with a lag. Notably the ECB will not act against EUR/USD in this
scenario, since it will see the advantages of a weaker EUR towards the USD for
energy imports and increasing competitiveness for Euro-zone products and
services abroad.
Scenario 3:
oil supply disruptions are expected to lead to a cut in oil flows to Europe by
1.5m b/d and push oil prices up to USD 150/barrel. Saudi Arabia will increase
production (the spare capacity buffer will fall), and the market situation will
call for an IEA Strategic Petroleum Reserve (SPR) release (see box), but with a
lag. As the market is concerned that the disruptions will be more severe than
in scenario 2, the price spike is followed by a huge spike in risk aversion
triggering a flight to safety by financial players away from risky assets, a
widening of credit spreads – recipe for broad USD strengthening and we will
likely see global rates go much lower. In this case the impact on the global
economy would be much larger and the EU will most likely tip back into
recession.
And to close, what does this oil
price spike mean for the potential spot price of EUR/USD?:
