Russia triggers European energy crisis but Middle East supply risks drop

Energy security and supply concerns in Europe took a front seat in the third quarter of 2022 after Russia restricted supplies in response to sanctions but these heightened tensions have been offset by a drop in recorded attacks on oil facilities, pipelines and tankers in the Middle East, the latest update of S&P Global Energy Security Sentinel research project showed.

Russia's war in Ukraine has been a major contributor to the surge in geopolitical risk. Energy infrastructure and shipping has been disrupted in the war zone with pipelines, power plants and refineries targeted. News reports by S&P Global Commodity Insights show there have been 46 security incidents and attacks on energy and commodities infrastructure in the conflict zone since the war began.

The uptick in disruptions to supply and energy security incidents around the Black Sea has been offset by a year-on-year decline in the number of attacks recorded in the Middle East in the third quarter. According to analysis of reported incidents there was only one attack in the Gulf region, including Iraq, in the three-month period through to Sept. 26, compared with eight in the same period a year earlier.

This came as talks between Iran and international powers to revive the nuclear deal picked up, though a final agreement remains illusive.

The investigation conducted by the Platts news team at S&P Global showed there were a total of 69 security incidents and attacks on energy infrastructure globally in the first nine months, a 156% increase from a year earlier.

"The oil market impact from the Ukraine war has highlighted the most important geopolitical shift for oil markets over the past decade," said Paul Sheldon, chief geopolitical advisor at S&P Global.

Crisis mode

Sanctions introduced against Russia following its invasion of Ukraine have had a major impact on commodity supplies and continue to cause major price volatility.

Sanctions have already reduced output from the world's largest producer of both oil and gas by approximately 2 million b/d. Russia has also restricted gas supplies to 12 European countries, triggering in some cases a 565% jump in prices year on year.

S&P Global forecasts that Russian oil disruptions will peak at 1.5 million b/d in the first quarter of 2023, or 1 million b/d below the August average.

"We believe a sizable portion of the 3.5 million b/d of crude and product that needs to be re-routed from Europe will find buyers not requiring Western shipping services, with or without a price cap, but the policy could further ease the trade flow shift by permitting Western insurance under a certain price level," S&P Global analysts said.

Prices for Russian crude grades have also been affected. Platts, part of S&P Global, assessed Urals at $62.735/b Sept. 23, compared with Dated Brent at $85.285/b. Prior to the invasion, Urals was trading at a discount of around $10/b to Dated Brent.

Meanwhile, natural gas prices in Europe have more than doubled, triggering a cost of living crisis and rampant inflation.

The benchmark TTF month-ahead gas price has gained 563% in a year, putting economies and energy policymakers in the region under pressure.

"Our reference case assumes 13% of price-driven industrial gas demand destruction with only limited recovery post 2023," S&P Global added in a recent note. "Europe will have to secure large amounts of additional gas if the region is to avoid deeper and more permanent demand destruction."

Saudi attacks drop

Excluding Libya, the Energy Security Sentinel project showed incidents in the Middle East -- a traditional hotspot for geopolitical risk linked to oil and gas production -- had fallen sharply since the second quarter of 2022.

In the first quarter, the bulk of the attacks in the Middle East were focused on Saudi Arabia and the UAE while in Q2 Iraq took center stage, as tensions between Baghdad and Erbil spilled into some of the oil and gas fields located in the semi-autonomous region of Kurdistan.

Prior to the recent lull in attacks, the geographical range of security events was seen spreading across the Arabian Peninsula to the Strait of Hormuz and the east coast of the UAE. Since 2017, the Gulf of Oman, the Red Sea and the Bab al Mandab chokepoint have experienced the majority of maritime and onshore attacks. A total of 88 incidents have been verified and reported by Platts through June 30, 2022.

Energy security has been brought into even sharper focus since Russia's invasion of Ukraine raised concerns over potential disruption and shrinking global spare capacity for both oil and gas.

The latest analysis by S&P Global of OPEC+ spare capacity shows that only Saudi Arabia and the UAE have the ability to bring a combined 1.3 million b/d of crude onto the market, underscoring the Middle East's critically important role as a supplying region.

The Middle East accounts for over 30% of the world's supply of seaborne crude, but the impact of security incidents on oil infrastructure in the region on the price of physical oil has been modest. Oil futures almost tripled at the peak of hostilities during the Tanker War in 1984.