I am not an energy expert by any means. Nor am I a Ukraine expert. So why not look at them both? 🙂 At least I can ask some relevant questions even if I can’t fully answer them.
I believe the consensus view on the Energy sector incorporates the consensus view on Ukraine – “there will be a stalemate.” We don’t have conditions for a stalemate in Ukraine (see below). That invalidates an big chunk of the energy market consensus.
I genuinely don’t know what “a flood of Russian oil and gas” does to the energy market dynamic. Or what is priced in. I do think you need a solid scenario to answer that question before you commit capital to the energy sector.
If you are looking at the energy sector, your investment thesis MUST at least consider these very plausible, potentially cascading scenarios.
- Russian retreat to (more or less) pre-invasion lines. Ukraine breaks through (again) and routs the Russian Army locally (again). Decisive loss (again) of Russian military hardware and trained personnel.
- Ukraine’s breakthrough turns into a rout. Russian equipment losses are massive. Russian morale losses are even more catastrophic. The Russian army melts back over the border leaving much of its equipment behind. Crimea is threatened as the Kerch bridge comes under fire…
- Putin’s government teeters on the brink. Russia’s 2024 (too-obviously-rigged) national elections go badly awry. Putin finds himself bleeding legitimacy – avoiding any windows above the 1st story.
Why does that matter to energy markets? Russia produces a lot of oil and gas. If they are in a hole, they will likely (choose one option only)
- Prudently maintain production at levels that sustain the long-term profitability of the global energy sector….
- Sell everything they can to anyone who will buy it at whatever price they can get. Try to buy off the populace; fund a factional power grab; and/or a personal exile plan B.
#2 seems a lot more likely than #1.
What about those sanctions? I’d expect the principled, steel-backbone politicians of Europe will find some way to buy lots of cheap Russian oil and gas once we get this whole “neighbor-invading” unpleasantness behind us. Especially as Russia actually has…
- …destroyed itself as a credible military threat.
- …shown that “we’ll turn off your gas!” ultimatum is not quite the threat many imagined it to be. No-one in Europe froze to death this winter. But Europe does need to re-fill for next winter.
Stalemate is a comfortable but wrong assumption.
The people predicting stalemate today are the same people who kept predicting Russia would “win” long after Russia had clearly lost. They were (obviously) wrong then. They are still (equally obviously) wrong now. But their collective echo chamber is big enough for them to feel comfortably wrong together.
The oil patch has a notorious political leaning (and thus a blind spot). Its denizens tend see the world through a more (ahem) “pro-authoritarian” political lens. The US oil industry is not known as a bastion of liberalism. Nor are the sub-set of investors who specialize in energy. Nor are many oil-rich US states or oil-rich countries (Norway aside). What feels comfortable inside that echo chamber doesn’t always synch well with reality.
A stalemate in Ukraine requires BOTH sides to be either exhausted or reined in.
- Russia is exhausted. It has been for 6+ months now. A stalemate is the best outcome they can hope for.
- Ukraine is NOT exhausted. They are winding up for a big offensive. Fresh tanks. Fresh troops. Fresh long-range missiles.
- No-one is talking much about “reining in” anyone. All the noises out of Ukraine’s backers are in the opposite direction. With the (large) exception of a weirdly Pro-Russia, Pro-Authoritarian element in the US. Some of whom likely live in or invest in Big Oil country… Also various German SPD politicians with compromising photos in their FSB files… but I digress.
Ukraine has beaten consensus expectations pretty well so far. Russia has screwed up pretty much every chance they have had. So the high-probability bet today is not “stalemate.”
If we get to late November 2023 without a big Ukrainian breakthrough, we might have a stalemate. That is what Russia should be playing for (instead of bleeding away tanks and troops in Bakmhut and Vuhedar). But Russia is not doing the smart thing…
