The invasion of Ukraine by Russia in early 2022 unleashed a series of shocks across the global commodity markets, particularly affecting the natural gas, oil and wheat markets. The conflict cascaded into an energy crisis of unprecedented scale, directly impacting supply chains, pricing structures, and international relations. The decisions made by Russia, and the responses from Europe and the rest of the world, have not only reshaped the immediate energy market but also set the stage for long-term strategic shifts in energy sourcing and consumption patterns. 

Natural Gas 

At the heart of the crisis was Russia’s strategic reduction of natural gas exports to Europe; a move by Russian producer Gazprom to cut supplies by 90%. This action was designed to undermine Western support for Ukraine, leveraging Europe’s heavy reliance on Russian gas as a political tool. The immediate consequence was a spike in natural gas prices worldwide, reaching levels that were tenfold higher than those seen in the years preceding the crisis. This price surge had a domino effect, significantly impacting sectors reliant on natural gas, such as fertilisers and petrochemicals, and contributing to a broader economic strain. 

Faced with an acute energy shortfall, Europe embarked on an urgent mission to diversify its energy sources. According to the International Energy Agency (IEA), the European Union has succeeded in reducing its dependence on Russian gas significantly. From a pre-crisis average of over 40% of its gas demand being met by Russia, the figure plummeted to less than a quarter in 2022, and further down to approximately 10% in 2023. This drastic reduction was facilitated by a pivot towards alternative supplies, notably liquefied natural gas (LNG) from the United States, which accounted for over 40% of the deficit created by the cut in Russian supplies. Europe’s response was not limited to sourcing alternatives. Significant adjustments were made on the demand side: industrial gas usage saw a nearly 25% decline, mild weather conditions and efficiency improvements led to a 10% reduction in consumption, and the accelerated deployment of renewable energy sources contributed to further easing the demand for natural gas. 

The ripple effects of the crisis extended far beyond Europe’s borders. A surge in natural gas prices contributed to a global economic slowdown, with the World Bank revising its global GDP forecast down to 2.4%, marking the slowest growth in three decades. Despite a retraction in prices from their peak, the market remains volatile, with European natural gas prices still significantly higher than historical averages, reflecting a new normal in the energy sector. The European Union’s concerted effort to reduce its dependency on Russian gas, coupled with the shift towards renewable energy sources and increased energy efficiency, signals a significant pivot in energy strategy. While the immediate crisis may have abated, the long-term implications for the natural gas market, energy security, and geopolitical relations continue to unfold. Recently the benchmark European contract, Dutch front-month futures, fell below €23 per megawatt hour. This represents the lowest level since May 2021, as gas prices have plummeted over 90% from their peak at €339 per megawatt hour after Russia’s invasion of Ukraine.    

Oil 

Conflict and subsequent US energy sanctions against Russia also resulted in surging oil prices. As a critical player, accounting for 12% of the world’s oil production in 2021, Russia’s involvement in the conflict led to a dramatic increase in crude oil prices. Records show that the WTI and Brent crude oil futures soared to their highest levels since July 2008, reaching $133.460/barrel and $139.130/barrel, respectively, in early March 2022. These price levels were sustained by a complex interaction of factors, including negotiations, sanctions, and varying responses from European and American countries, further exacerbated by the Fed’s interest rate hikes and the strengthening US dollar. However, really what characterised these price movements more than anything was fear.   

One study explores the war’s significant influence on oil price volatility. The study found that the Russia-Ukraine conflict accounted for 70.72% and 73.62% of the fluctuations in WTI and Brent crude oil prices, respectively, during the event window. This underscores the war’s critical role in driving the oil market’s instability and setting a new trajectory for oil prices. Despite facing stringent international sanctions, Russia maintained its stature as a key oil exporter. In 2023, it stood as the third-largest oil producer globally, trailing behind the United States and Saudi Arabia, and remained the second-largest oil exporter. The sanctions and global market shifts prompted Russia to redirect its exports, significantly increasing shipments to countries like India, China, Türkiye, and the Middle East, even as its exports to traditional markets in the European Union, the United States, the United Kingdom, and OECD Asia plummeted. 

Another thing to consider is how the Russia-Ukraine war has impacted the OPEC+ arrangements and their evolution in response to the crisis. The primary challenge for OPEC+, which consists of the Organization of the Petroleum Exporting Countries (OPEC) and 10 other oil exporters including Russia, has been managing the supply amidst the changing global landscape due to the war. Despite the geopolitical tensions and sanctions against Russia, OPEC+ decided to maintain its policy of adding 400,000 barrels per day (bpd) to the supply, although it struggled to meet this target due to various disruptions, leading to a tightening in the market and a rise in oil prices. 

Russia’s role within OPEC+ has been notably impacted by the sanctions and the international backlash to its war in Ukraine. Before the conflict, Russia was a pivotal player in OPEC+’s policymaking, but its influence has diminished as its oil production and exports have declined. This decline contributes to the growing supply gap in OPEC+, affecting the coalition’s ability to meet its production targets. Despite these challenges, OPEC+ members, particularly Saudi Arabia and other major Arab producers, have resisted pressure from the United States to sever links with Russia, choosing instead to maintain their alliance. 

In October 2022, OPEC+ made a significant decision to cut oil output by two million barrels per day (bpd), aiming to boost crude prices. This move was criticized by the United States, which saw it as a sign of Gulf producers siding with Russia at the expense of Western nations. The decision to cut production was defended by OPEC members as necessary to maintain market balance amid rising interest rates in the West and a weakening global economy. However, analysts and some Western officials interpreted this move as politically motivated, potentially aimed at supporting high oil prices to the benefit of Russia and the OPEC+ members themselves. 

Wheat 

Finally, Ukraine, is one of the world’s leading producers and exporters of wheat. Due to the conflict, Ukraine has naturally faced substantial disruptions to production of wheat, which has had wide reaching effects on the global market. This situation has escalated concerns about global food security and poverty, given the vital role of wheat in the global food supply chain. The war is estimated to have caused prices to surge by approximately 2% globally overall, spiking aggressively upwards by 27% at the height of the fear stage of the conflict when supply concerns were at their peak. This price increase, while seemingly modest, has significant implications for food affordability and access worldwide, particularly in wheat-importing countries. These nations have experienced a downturn in wheat consumption due to heightened prices, exacerbating food insecurity among their populations. 

Another immediate economic impact has been the shift in wheat export dynamics. Russia has capitalised on the situation by increasing its wheat exports to countries that traditionally depended on Ukrainian wheat. This shift has not only altered global trade patterns but also inflicted a substantial welfare loss on Ukraine’s wheat producers, estimated at $1.4 billion. The loss encapsulates the broader economic and social toll of the conflict on Ukraine’s agricultural sector. Ukraine’s role as “Europe’s breadbasket” is an important one. Prior to the conflict, the nation was a top exporter of several key agricultural products, including sunflower oil, barley, maise, and wheat. The war caused a dramatic 29% drop in Ukraine’s grain production for the 2022/2023 period, severely limiting its export capacity. The Russian blockade of Ukraine’s Black Sea ports has been particularly detrimental, bringing exports to a near standstill and striking a blow to global food distribution networks. Additionally, Ukraine’s wheat exports are crucial for many Asian and African countries, many poorer nations rely on Ukrainian wheat to meet their food needs. With Russia’s decision to exit the Black Sea Grain Initiative, the situation has worsened, further straining the global food supply chain and heightening the food crisis.  Since the 27% spike wheat prices have now collapsed to below pre-war levels, it seems that while there is clearly some significant influence at play here, the fundamentals of this market will ultimately always win out. 

Reference:

Russia’s War on Ukraine – Topics – IEA

Where does the EU’s gas come from? – Consilium (europa.eu)

https://energy.ec.europa.eu/system/files/2023-01/Quarterly%20report%20on%20European%20gas%20markets%20Q3_FINAL.pdf 

Phase Two of the Price Cap on Russian Oil: Two Years After Putin’s Invasion | U.S. Department of the Treasury

(PDF) The impact of Russia–Ukraine war on crude oil prices: an EMC framework (researchgate.net)

Q&A | Challenges for OPEC+ amid the Russian invasion of Ukraine – Center on Global Energy Policy at Columbia University SIPA | CGEP

Russia losing OPEC+ clout as Ukraine war weakens oil market role | S&P Global Commodity Insights (spglobal.com)

Is OPEC ‘aligning with Russia’ after production cuts? | OPEC News | Al Jazeera

Zachariah Walker

Content Writer at Finalto

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