Impacts of Russian Sanctions on the Petroleum Industry

Russian Sanctions

The marketplace for oil and gas, energy, chemicals, and other products of the petroleum industry are in the midst of a major transition. For many, the global movement to decrease mankind’s dependence on fossil fuels has reached a critical point. That is, if we still hope to avoid the worst outcomes from climate change.

However, petroleum derivatives make up a significant portion of the feedstocks for chemicals such as plastics and lubricants. They are also components in products which are used every day including: toothpaste, guitar strings and chewing gum. While incentives may reduce the demand for petroleum based energy and foster the transition to alternative energy sources, there remains a high demand for manufactured products.

In February 2022, the debate over climate change escalated as economies worldwide lifted Covid restrictions and economic activity in many industries escalated, foreshadowing a return to near “normal”. Vladimir Putin chose this time to attempt a Russian takeover of neighboring Ukraine.

Fuel and energy prices soared as countries who supported Ukraine implemented sanctions limiting purchases and imports of Russian gas. The Europe Union negotiated with EU member countries to minimize their reliance on Russian energy in phases, viewing pipelines such as the Nord Stream pipeline, as a now unreliable source. These sanctions required alternative sourcing of oil and gas from other countries. Suddenly, oil imports to Europe increased and prices rose. Shipping oil tankers at sea were being diverted to the highest bidder. Transportation and fuel price increases contributed to higher prices and inflation.

Rising prices for petroleum and natural gas benefited the oil companies that extract and supply these resources with improved cash flow. These same companies in the petroleum industry were hit hard by reduced demand and lower prices during pandemic lockdowns. Thus they have been slow to increase production as their bottom line recovers. The global rise in prices also benefited Russia and softened the impact of sanctions.

How are the sanctions against Russia impacting oil and gas prices now?

In March, according to The New York Times, the International Energy Agency (IEA) warned that the global economy could be facing both cuts in oil supplies and also a sharp drop in demand, and that the world could face the biggest supply crisis in decades.” Indeed, the initial impact of the war, Russian sanctions and supply chain disruptions sent oil prices into orbit.

Recently however, the United States has observed a decline in oil prices over the summer months due to temporary measures such as:

  • Gas tax suspensions
  • Releases from the Strategic Petroleum Reserve
  • Manufacturing closures worldwide, especially in China, from Covid outbreaks
  • Fears of recession

On August 11th, CNBC reported that the IEA “now sees 2022 demand growth of 2.1 million barrels per day, which is 380,000 barrels per day higher than prior forecasts.” In addition, the EU has not yet implemented the full extent of their fuel purchase sanctions. Higher demand and additional sanctions are likely to lead to a return of higher prices in democratic countries, unless additional measures are implemented to increase production.

Expect uncertainty and volatility in the price or oil, gas, chemical products and chemical transportation costs. As winter approaches and the EU implements remaining fuel purchase sanctions against Russia, rising gas prices may return. A very cold winter, hurricanes or weather related events in oil producing regions, and / or other global political factors could send prices soaring. However, a slowing economy, inflation reduction policies, or a mild winter could keep demand under control.

Compartment and Chemical Tank Trailers remain in demand despite Russian sanctions

Even with rising prices for energy and source materials, The American Chemistry Council’s (ACC’s) Mid-Year Outlook released in June predicted continued growth in the chemical sector ending the year with outputs up 4.1% in 2022 and an expected increase of 2.4% in 2023. Acknowledging that supply chain disruptions from the war in Ukraine and plant shutdowns in China, continue to be limiting factors on the supply chain and production. The ACC also noted that 1) slowing demand could be a positive for the chemical industry, alleviating some pressure on the supply chain and 2) that the US has a robust petroleum industry and stable supplies of fuel and natural gas. Thus the US is well positioned to meet the domestic and global need for manufactured chemical products.

Global economic and geo-political events inject uncertainty in the demand for compartment trailers and chemical tank trailers, but indications are still that demand will remain strong into 2023. In anticipation of this growth, contact Matlack Leasing, LLC at 1-800-MATLACK to discuss the availability of tank trailers near you.