RE:RE:RE:SpeciallygoodI have been busy with Thai wedding celebrations here for a friend, so havn't been able to keep up as much as I'd like to.
I agree with what Experienced has said on almost all points.
I'm not a Russia expert, but think the oil market would spike significantly if there was an invasion. It would also be a drag on global markets, and benefit China, watching what the west does, as it considers taking Taiwan.
I also agree that I don't expect an invasioin to happen soon, if at all. There are going to be some Russian army drills scheduled in Belarus in Feb, and some Naval drills in the Black Sea soon on the calendar. These place a lot of firepower closer to the potential action. I think there will be some further posturing and escalations to come yet. Ukraine is on Russia's doorstep, and important for them to maintain it under their influence, and not be a NATO member, as is Kazakhstan. It is like the Cuban missle crisis in reverse for the Russians.
There are varying degrees of conflict. Small border skirmishes, a measured amount of bombing and artillery action, taking the Donbass, then a few more levels before a full scale invasion and occupation. It may not be likely, but if not done completely, it would throw the rest of Ukraine into the arms of the west, and be on Russia's doorstep. At what point or level does it have to get to before the west takes action? That line is somewhere in between, around the 'mid level' conflict stage according to Biden when pressed by the media for answers last week. Perhaps no line at all.
The west does indeed have some tough things they could do in terms of Russian economic sanctions. There are about 3 mmbpd of the 10mmbpd of Russian oil that is now sold to EU countries, so about 30% of Russian production. Inconvenient, but replaceable for the EU.
Gas is also significant, but flows from Russia have been minimal, which low supply levels at present gives Russia more room to maneuver and be bold at this time. Germany favors economic self mutilation and freezing to death rather than choosing military options, by choosing to keeping Nordstream 2 offline rather than sending arms.
The end of European winter is around the corner, and has fortunately so far been mild. If Europe can hold out a little longer till closer to spring, it won't be so devastating if Russian gas flows stop.
Oil and gas energy exports are Russia's money lifeline. If those exports or prices are in any way curtailed by sanctions, it hurts. It may create a situation that Iran faces, trying to scramble to find buyers willing to skirt sanctions at a discount.
Enter the Dragon...
China would be thrilled at the opportunity to buy the extra 3 mmbpd of Russian sanctioned oil previously used by the EU at a discount, instead of buying from other places, just as they do with Iran. The EU would then end up buying the oil China stopped purchasing from the middle eastern suppliers. Tankers can go anywhere. Gas pipelines cannot. There is presently not enough LNG shipping infrastructure around, and it's loss would be costly for the Europeans, and Russians. Recently there was an LNG tanker that loaded from the US GC, went throught the Panama canal towards Asia. The cargo was then resold in mid Pacific. It turned around at Hawaii, and went back through the Panama canal, headed for Europe. LNG traffic to Europe has grown tremendously, the bigger bucks drawing it in and driving the price up in the Asian market.
Oil sanctions placed by the west onto Russia would be a bit like herding cats. Although it would restrict Russian production to a degree, it would most likely cause a change in tanker routes with net oil off the market being minimized. However it would still be costly for Russia realizing lower prices.
To see what past economic sanctions might do, check out the 10 yr USD/Ruble chart after what happened in Crimea 2014. It was normally around 30 Rubles per dollar, then in 2014 it spiked to 60's then 80's with sanctions, then levelled to the 60's, and with this Ukraine worry, the Ruble lost about 10% the last couple months, now up to 77.75 again. This is all with no shots that have been fired yet, nor any sanctions imposed.
The currency drop was significant in 2014, and even caused a ripple effect real estate crash here in Thailand, as a flood of Russian vacation properties and condos hit the market all at once as Russian economy stumbled. Tourism from Russia has never really recovered, and the beaches and pools normally full of white skinned Ivans in their speedos has become thankfully peaceful and much nicer without that gag reflex.
What does it all mean for me and my admitted bullish bias? The ongoing tension adds support to oil prices and fears of supply curtailments at the moment, and that means as every day goes by, it means more profits for Canadian energy producers.
I note also that differentials have narrowed, to around $13.70 from $20 recently. Next weeks markets are expected to hold back, waiting for Wednesday's Fed, then we have OPEC in 12 days, then energy's earnings season. Granted, Suncor had some operational issues that will affect earnings in '21 Q4, but looking forward, it is on a steady boring and stable upward path of FCF generation, buybacks, and dividends, the exact stuff that fits in the long term hold models of many non ESG institutional investors looking to put money to work elsewhere.
Reflecting on the last few days watching bloodshed in the markets, as many have been calling for and expected was coming, and considering Friday's jittery action with 3.3 $TRILLION of options expiring in a single day, I am impressed by the fact that energy is the only positive sector in the S&P this year to date. It is the top sector to own. If you own it, you have clearly picked the best and strongest racehorse of all.
Experienced wrote: delissio wrote: Experienced, I have followed your posts for a while on this board and .... hats off to you, you have my highest respect. Many thanks for sharing your thoughts and ideas.
The question about the possible war - is there a possibility of the oil price impact due to the international sanctions on Russia. Thank you.
Experienced wrote: Before addressing your response to my post, I would like to thank NP and especially Obscure for their posts. Obscure, your discussion of GS and the others in the "Investment Business" are accurate. I know because I was one of them at one time.
Speciallygood, I would like to apologize to you for my somewhat rude and flippant response to your post. You deserve better.
My response to your post wasn't so much that I know better than the person who wrote the article that you referenced, but I saw it as classic example that I saw so many times in my past life where a straw man is created. That straw man is then used to create a scenario which may turn out to be true but at the time it is written has no basis in actual fact or more importantly is not backed up by any facts or even a plausible explanantion of how it could happen. The scenario is then used as Obscure pointed out to create a certain impression which in turn encourages actions by the readers from which the firm can benefit and often results in the reader (client) losing money.
I don't know what Putin is thinking or whether he will decide to invade The Ukraine. I must admit that my knowledge of that part of the world is such that I view an invasion by Russia, at least beyond the Donbass, as highly unlikely. The reasons for that are lengthy and are for another time.
Irrespective of whether Russia does or does not invade The Ukraine, the question investors in SU need to assess is whether that action would result in an increase in the price of oil due to a supply shock.
To answer that question, people need to think about how a supply shock would happen.
Would it happen because OPEC decided to cut production because of the invasion?
Would SU and other Canadian oil producers cut production because of the invasion?
Would US frackers cut production because of the invasion?
Would Russia itself cut production because of the invasion?
If the answer to any of these questions is yes, then perhaps the price of oil will go up. If the answer to all four questions is no then the price of oil is unlikely to go up due to an invasion.
There was a time long ago that the price of oil did go up simply due to a conflict somewhere in the world but those days are long gone and people are generally more sophisticated than the "old days" and shrug these things off unless there truly is a supply or demand shock resulting from the conflict.
Thank you for your kind words - much appreciated!
Your question is a good one and gets to the heart of the matter.
When I look at a question like that I deal in facts and numbers and practicality.
After the Annexation of Crimea by the Russians, The West imposed sanctions on Russia which entailed some limits to access to capital markets and more importantly access to newer western oil and gas technology and prevented western oil and gas companies from doing business with the Russians.
The question then becomes "What additional sanctions can actually be imposed on Russia if it invades The Ukraine?"
Right now they do not have access to western technlogy WRT to oil and gas production or expertise from western companies except indirectly through their agreements with China so there is very little available in terms of further sanctions in this regard.
Russia is currently frozen out of many Western capital markets but not all of them and so there may be some additional sanctions in this area but again the Chinese are more than willing and able to fill this breech to gain leverage over the Russians.
So the big thing left in practical terms is to limit the sale of Russian oil and natural gas. But in practical terms is this actially a realistic option?
Russia produces about 10 million barrels of oil a day. About 1.5 -2 million barrels a day is shipped to China through recently built pipelines. The rest basically goes to Europe with Germany and the Netherlands the primary customers.
Forgetting about Nordstream and the other natural gas pipelines from Russia to Europe, if the West imposed an oil embargo on Russian oil, where would Europe get its oil??, especially if Russia invaded The Ukraine this winter. Eight million barrels a day would be impossible to replace. OPEC is struggling to even maintain production at current quota levels. US oil production has declined somewhat but even if it was somehow ramped up, we are talking at most a million barrels a day. Canada is in the same situation. Mexico and Venezuela are a mess.
Further, The West is suffering under a ramp up of inflation and a longer term spike oil prices would make that problem larger and could trigger a major recession in the West.
When one looks at all this from a practical point of view, it is unlikely that any new sanctions on Russia would entail an oil embargo. A big clue is that Biden talks about devastating new sanctions on Russia if they invade The Ukraine but is very short on specifics as to what the US can actually do. As well, in his news conference, he basically said in response to a question that if Russia stops in the Donbass, the US won't do anything and as I mentioned before, IMO, it is highly unlikely that Russia would attempt to invade all of The Ukraine for a whole bunch of reasons.
So what is likely to happen if Russia invades The Ukraine?
1.....there could be a short term spike in oil and gas prices which will present a short term trading opportunity
2....some further restrictions on Russian access to capital market but little more which would be hard to trade off it from an investment point of view
In sum - a tempest in a teapot.
Hope this helps...