No matter what indicator you use, Russian President Vladimir Putin is winning in the energy markets.
Moscow is milking its oil cash cow, earning hundreds of millions of US dollars every day to bankroll the invasion of Ukraine and buy domestic support for the war.
Once European sanctions against Russian crude exports kick in from November, the region’s governments will face some tough choices as the energy crisis starts to bite consumers and companies.
Illustration: Yusha
Electricity costs for homes and businesses are set to soar from October, as the surge in oil income allows Putin to sacrifice gas revenue and squeeze supplies to Europe.
UK prices are likely to jump by 75 percent, while in Germany some municipal utilities have already warned prices would increase in excess of 100 percent.
Russia has successfully weaponized energy supplies. Western governments will come under increasing pressure to spend billions either subsidizing household bills or, as is already the case in France, by taking control of power companies.
The first indicator showing how Putin has turned the oil tide is Russian crude oil production.
Last month, the country’s output climbed back to near pre-war levels, averaging almost 10.8 million barrels per day, only marginally down from the 11 million pumped in January immediately prior to the invasion of Ukraine.
Based on industry estimates, oil production is slightly higher so far this month.
It is not a blip. Last month marked the third consecutive month of oil production recovery, with output up significantly from this year’s low point of 10 million barrels set in April, when European buyers started shunning Russia and Moscow scrambled to find new buyers.
After that initial struggle, Russia has found new customers for the million barrels a day that European oil refiners have stopped purchasing due to self-sanctioning. Most of that crude oil is ending up in Asia — notably India — but also in Turkey and elsewhere in the Middle East.
Some is also showing up in Europe, with buyers still purchasing Russian crude oil ahead of the planned introduction of official sanctions in early November.
Everyone who bet that Russian oil production would continue to drop got it wrong.
The second indicator is the price of Russian oil. Initially, Moscow was forced to sell its flavors of crude oil at huge discounts to other varieties to entice buyers.
However, in recent weeks the Kremlin has regained pricing power and taken advantage of a tight market.
The Eastern Siberia-Pacific Ocean (ESPO) crude oil pipeline produces a category of Russian oil that is a good example of the new trend. Earlier this year, it sold at a discount of more than US$20 a barrel to Dubai crude, the regional oil benchmark for Asia. ESPO crude has since changed hands at parity to Dubai.
Urals crude, the flagship Russian oil export to Europe, is not benefiting as much as ESPO, as its key buyers have traditionally been countries such as Germany rather than India.
However, it is also recovering in price, selling at US$20 to US$25 a barrel cheaper than the Brent benchmark, after trading at a discount of about US$35 in early April.
Moscow is finding new commodity traders, often operating from the Middle East and Asia and probably financed by Russian money, willing to buy its crude and ship it to hungry markets.
With Brent crude hovering at close to US$100 a barrel, and with Russia able to offer smaller discounts, there is plenty of money coming in to the Kremlin. For now at least, energy sanctions are not working.
The final indicator of Russian success is political, rather than market related. In March and April, Western policymakers were optimistic that the OPEC cartel, led by Saudi Arabia and the United Arab Emirates, would ditch its alliance with Russia.
The opposite has been the case. Despite a trip by US President Joe Biden to Riyadh, Putin has retained his influence inside the OPEC+ alliance.
Soon after Biden departed from Saudi Arabia, Russian Deputy Prime Minister Alexander Novak, the nation’s point-person managing the relationship with the cartel, flew to the kingdom.
A few days later, OPEC+ announced a minuscule oil production increase, keeping pressure on global energy markets.
The oil market victory means Putin can afford to forgo revenue by restricting natural gas sales to Europe, putting pressure on Berlin, Paris and London, which are bracing for massive retail energy price increases and potential shortages that might lead to rationing this winter. Moscow is making so much money selling oil it can also afford to restrict crude supply to Eastern European nations, as it did last week.
A combination of cold weather, surging demand for electricity and soaring prices later this year risks undermining Western support for Ukraine.
European politicians who have been eager to win international kudos by flaunting their support for Kyiv may be less willing to foot the domestic bill for averting energy poverty among their own voters.
In public, European governments are still resolute in their determination to wean themselves off Russian energy. Privately, they must be acknowledging the hardships that stance threatens to inflict on their economies.
Putin is winning the energy battle: We should hope that leverage is not powerful enough to prompt Western politicians to soften their stance in the real war.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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