Prior to the Ukraine war, Russian oil and gas accounted for about 30% and 40% of EU consumption, respectively. EU countries would need to agree unanimously on any embargo for it to take effect, and Hungary has reportedly threatened to veto.
But while discussions among EU officials are still ongoing, we see several implications of Europe’s efforts to reduce its reliance on Russian energy:
Supply uncertainty is likely to keep energy prices supported. While oil prices have been constrained by demand and growth concerns in China as it struggles with the spread of COVID-19, we think oil markets are probably underpricing energy supply risks at this stage. We expect Brent crude to trade around USD 115/bbl over our forecast horizon, compared with USD 106/bbl at present, and we maintain a global sector preference for energy equities. Given the risk of further supply disruptions, we see commodities as an effective geopolitical hedge within portfolios.
A sharper focus on energy security will be a longer-term consequence of the war. As countries seek to reduce their reliance on Russian energy, we expect them to step up investments in renewables and energy efficiency, which means the quest for energy security dovetails with the drive to reduce carbon emissions. More broadly, we see the emphasis on energy security as part of a shift in which governments and companies optimize for reliability of supply rather than efficiency or price. We believe this trend has implications spanning data (e.g., cybersecurity), defense, food, and the climate, as well as energy.
While further supply disruptions are likely, in our central scenario the Eurozone economy will avoid a recession. The Financial Times reports that the package of measures under discussion includes a phased-in oil embargo to take full effect by the end of the year, which would mitigate the near-term impact. It would also reportedly include exemptions for Hungary and Slovakia. Overall, we think the impact on economic growth of the reported measures is likely to be manageable. Habeck said Germany had made “great progress” in finding alternatives to Russian oil, though he noted some other countries may take longer to adapt. The economy minister said that Germany has now reduced the share of Russian oil in its imports to 12%.
We are also monitoring flows of gas closely following Russia’s decision last week to cut off supplies to Poland and Bulgaria. As we wrote in our latest Global Risk Radar, our central scenario envisions more interruptions of Russian gas supplies to Europe going forward. Some of the targeted countries may experience economic stagnation or mild contractions in the process. However, we still believe that a full cutoff of Russian gas supplies to Europe and a Eurozone-wide recession will be avoided in our base case.
So, we see several consequences of the sea change in Western attitudes toward Russian energy, which are likely to have implications for investors in both the near and longer term.
Main contributors - Mark Haefele, Vincent Heaney, Daniil Bargman, Giovanni Staunovo, Dean Turner, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Read original report - Energy security in focus as Europe mulls Russian oil ban, 3 May 2022.