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Russia-Ukraine Conflict | Advisor Pulse

Matt Muenster

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Matt Muenster
February 24, 2022

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March 7, 2022 - Update

Continuation of the Russia-Ukraine conflict has sent unprecedented shockwaves through energy markets since Russia’s initial invasion on February 24. In response, many countries have turned against Russia by intensifying economic sanctions and/or unofficially choosing to abandon them as a supplier of crude oil, refined products, natural gas, and other commodities. This has left crude oil and transportation fuel prices exposed to more volatility than ever before and on the cusp of never-before-seen levels—a harsh reality with an end that remains heavily unknown.

New Energy Market Developments Since Last Week

Last week’s Advisor Pulse highlighted that Russian energy products were exempt from sanctions. This was believed to be because of uncertainty around the scope and duration of the disruption and an inability of customers to quickly replace Russian supply in an already-tight market. Now, however, key players like the United States and European Union are threatening to ban Russian energy imports altogether to further cripple the Russian economy as punishment for its attack. Whether all of Russia’s crude oil and refined product exports are removed from the supply equation will depend on whether NATO countries choose to sacrifice their energy security and seek replacement suppliers. Collectively, these measures may change Russia’s energy market reputation, its contribution to the global supply landscape, and fuel price dynamics for longer than the duration of the war in Ukraine.

Price Impacts And Comparison

The oil market would be out about another 3 million barrels of crude oil per day if countries not named China—Russia’s main ally—choose to move away from Russian imports. The U.S. is a relatively small buyer of Russia crude oil and refined products at roughly 0.5 million barrels per day, but Europe would feel the brunt of the impact of an embargo. European diesel prices have already skyrocketed to near-record levels because of this threat, driven both by Brent crude oil prices above $120 per barrel and diesel refinery margins that have also been inflated by the controversy.

From a U.S. price standpoint, at 461.3¢ per gallon, national wholesale diesel prices on March 7 were nearly 100¢ per gallon higher than on February 28. Additionally, another drastic price increase of 15-20¢ per gallon is expected on Tuesday, March 8 because of the market’s response to a possible Russian import ban. Quick and large wholesale price moves have also caused DOE-Wholesale spreads to decrease to range between -20 to -50¢ per gallon since March 3. This is due to last week’s small DOE retail adjustment occurring before the bulk of the energy commodity price increases experienced throughout the week.

DOE-Wholesale spreads are expected to remain negative this week and will stay tight until DOE retail adjustments reflect the steep gains both seen and anticipated in the wholesale market. Regardless, Breakthrough Fuel Recovery accounts for all price volatility—including that associated with the Russia-Ukraine disruption—to ensure carriers are accurately reimbursed for the market price of diesel.


February 24, 2022 - Original Post

Energy Market Update

Russian troops invaded Ukraine and Ukraine’s President issued a statement declaring martial law. Ukrainian allies, including the U.S., are expected to impose further economic sanctions on Russia. From previous Breakthrough Advisor coverage, you have become aware that Russia is a significant producer of global energy supplies, particularly crude oil and natural gas. Sanctions have already targeted Russian energy infrastructure plans in Europe (Nord Stream 2 natural gas pipeline). Further sanctions are likely to target the Russian energy industry because of its role in its economy. Russia exports about 4.5 million barrels of crude oil and refined product daily so any disruption of Russian exports can have a profound impact upon global energy prices. To our knowledge, applying sanctions to the movements of energy supplies has not been directly discussed at this time. There does not appear to be a quick resolution to this conflict. The scope and duration of disruption will remain speculative and will drive energy prices higher.

The Impact on Energy Prices

Markets responded to the progression of developments that culminated in Russia’s invasion of Ukraine. Wholesale diesel prices increased more than 55 cents per gallon (19 percent) from the initial threat of U.S. sanctions that occurred on December 7, 2021, leading up to the Russian invasion on February 24, 2022. This is shown in the chart below.

Markets also responded quickly to this morning’s invasion (following figures as of market close PM CST on February 24, 2022).

  • Crude oil prices (WTI) started the day near $100 per barrel but finished less than $1 per barrel higher at $93 per barrel (Brent crude rose to $99 per barrel).

  • Diesel prices increased about 6 cents per gallon (national wholesale prices near $3.70 per gallon). The DOE-wholesale spread will subsequently contract by about 6 cents per gallon.

  • Commodities outside of energy (e.g., agricultural) are also facing upward price pressure.

  • Global currencies are volatile.

  • The U.S. has begun coordinating an oil release from the Strategic Petroleum Reserves with other countries also bringing supplies onto the market.

Global energy supplies were tight before the elevated risk and eventual geopolitical crisis arose. A swift resolution to the conflict does not seem likely. We expect transportation energy prices will therefore remain high for months to come. Many comparisons are being made to 2014 as the last time WTI oil prices were above $100 per barrel. For a comparison on the impact to diesel prices, the following graphic compares the diesel prices from July 2014—the last month where oil prices averaged over $100 per barrel—and an estimated diesel price for tomorrow, February 25. The overall price of diesel is higher in today’s market, due to a larger diesel crack spread from diesel demand as well as higher other cost elements (like fuel terminal margins and state taxes).

Helpful guidance:

  • Wholesale diesel prices rise approximately 2.4 cents per gallon for each $1 per barrel increase in the crude oil market.

  • The Applied Knowledge Team communicated a significant Q1-Q2 2022 forecast increase with clients during our mid-month webcast on February 16. This remains our expectation. The next forecast release will be on March 2, 2022 as part of the March Advisor publication.