Diving into a potential European ban on Russian energy … will Russia become Venezuela? … Eric Fry’s take on this “Trade of the Decade”
Derail the Russian war machine.That’s what the Western world wants.And that was the goal of the smorgasbord of sanctions that Western governments placed on the Russian economy and various high-profile Russian citizens shortly after the Ukrainian invasion.However, at the onset of these sanctions, there was one industry conspicuously absent from the list of targets – energy.You’ve likely heard by now that Russia’s economy is hugely dependent on its energy complex. That’s because its oil and gas sector accounts for roughly 40% of its federal budget revenues and about 60% of its exports.So, want to hurt Russia? Hurt its oil.Of course, the Catch-22 is that by hurting Russia’s energy complex, it inflicts massive pain on the wallets of billions of people around the world. That’s why Western nations dragged their feet on Russian energy sanctions. However, eventually, President Biden declared a complete ban on Russian oil, gas, and coal imports.
| ***The thing is, Russia doesn’t really export a great deal of energy to the U.S.You can see this in the chart below from the U.S. Energy Information Administration.The chart breaks down Russia’s crude oil exports, showing Europe up top, Asia in the middle, and the “rest of the world” which includes the U.S. at the bottom.I’ve circled the U.S.’s share of Russian oil production. As you can see, it’s not big. |
But what is big?Europe.About half of Russia’s daily crude export goes to continental Europe.From Fox Business News:
Europe is the biggest purchaser of Russian crude, importing about 138 million tons in 2020 out of Russia’s total exports of 260 million tons – or roughly 53%, according to the BP Statistical Review of World Energy.Russia supplies about one-quarter of Europe’s oil needs.
Europe becomes even more important to Russia when we look at natural gas.Below, you can see that Europe receives the lion share of Russia’s natural gas exports, which is up top in blue. (The U.S. hasn’t imported any Russian natural gas since 2019.)
Given this, a ban on Russian energy from Europe would be monumental.Of course, a few weeks ago, such a move was unthinkable. After all, where would Europe turn to replace its energy needs? Shutting off Russian energy would seemingly be economic suicide, driving up energy costs, which would cripple parts of its economy.Well, it appears Europe is getting closer to this outcome, regardless.
***Is Europe going to ban Russian oil?Let’s jump to Politico:
European Union officials are fine-tuning a phaseout of Russian oil imports, which could be presented to EU countries as early as (this) week, but it’s still unclear how hard they will dare to squeeze President Vladimir Putin’s core revenue stream…An immediate, full-blown ban imposed by the EU on oil is still a no-go for economic powerhouse Germany. Berlin has indicated to other EU capitals it’s ready to consider cutting Russian oil — even if it is not yet able to abandon imports of gas — but only under specific conditions, which are now being discussed with the European Commission.On Wednesday, Foreign Minister Annalena Baerbock said: “Oil imports will be halved by the summer and will be at zero by the end of the year.”
If you’re reading this, thinking: “Isn’t this going to create major upward pressure on global energy prices?” Yes – and you’re not the only one thinking that.
From Fox Business News:
Treasury Secretary Janet Yellen on Thursday questioned the efficacy of a European ban on Russian oil and gas imports, warning that it could have unintended economic consequences for the U.S. and its Western allies…“Europe clearly needs to reduce its dependence on Russia with respect to energy, but we need to be careful when we think about a complete European ban on, say, oil imports,” Yellen said…“(A European ban on Russian oil) would clearly raise global oil prices, it would have a damaging impact on Europe and on other parts of the world, and, counterintuitively, it could actually have very little negative impact on Russia, because although Russia might export less, the price it gets for its exports would go up,” Yellen said.
***While some readers might be thinking “it’s time for an energy trade,” others might be thinking: “But what happens if the war ends soon? Would prices go back to normal?”For that answer, let’s jump to our macro expert, Eric Fry.Eric has been all over the oil trade for months, already leading his Speculator subscribers to an energy trade that’s up 198% as I write Monday morning.From Eric’s Speculator alert last Thursday:
Russian oil will NOT be flowing West again anytime soon, even if the Ukraine conflict ended tomorrow and Putin quit the Kremlin and moved into a retirement home.Western sanctions are preventing many would-be buyers from going anywhere near it. And even where national laws still allow Russian oil, the stuff is becoming increasingly toxic to corporate reputations.It has become “blood oil,” which is why Russian crude is selling at $20 to $30 discounts to Western benchmark crude prices, like Brent crude and West Texas Intermediate crude.
***For a peek into Russia’s future, look to Venezuela’s pastAs we analyze an oil trade today, it’s important we look beyond the next six to 12 months.What are the long-term effects on Russia’s oil complex from the global response to Russia’s invasion?Fortunately, there’s precedent to give us an idea.Back to Eric:
Looking longer term, Russian oil production is almost certain to drop sharply, simply because almost every major foreign oil company is packing up and leaving.And as they leave, they are taking their technology and investment dollars with them.Venezuela provides a grisly example of what can happen when Western technology and investment abandon a specific nation’s oil industry.During the early 2000s, the administration of then-president Hugo Chávez jacked up taxes and royalties several times on the foreign oil companies operating in Venezuela. He also barred these foreign firms from holding majority stakes in any new projects.These maneuvers effectively chased most foreign companies out of the Venezuelan oil industry. As a result, the country’s crude oil production has plummeted by 80% since the end of 2000.Therefore, if past is prologue, the world is about to lose a significant amount of production from its No. 3 oil producer, Russia.
To Eric’s point, a few weeks ago here in the Digest, we’ve noted how all the major oil exploration and production companies have fled Russia (think Exxon, BP, and Shell). So too have the oil services companies that use the latest extraction technologies and equipment (Halliburton, Baker Hughes, and Schlumberger).While western sanctions might impact Russian energy output today, this vacuum of oil-related capital and cutting-edge technology threatens to have an even bigger impact tomorrow.
***All of this is creating what Eric believes could be the Trade of the DecadeLast week, Eric held an urgent, live event detailing the extraordinary opportunity in top oil plays.He explained why we’re looking at a “new normal” of oil at $100+ a barrel (though don’t be surprised to see spikes up to $150, possibly even $200).This is driving a major bull market for elite oil and gas stocks.Bottom line, the massive imbalance in the global energy markets is not going to resolve soon. And if Russia truly does become a global pariah for years to come, it will create long-term upward pressure on energy costs.If you missed Eric’s free presentation last week, click here for a replay. I should add that Eric gives away the name and ticker of one of his favorite oil stocks that stands to benefit from this “Trade of the Decade.”Have a good evening,Jeff Remsburg
