Energy Update

The global energy market is facing a historical crisis, with supply concerns continuously driving prices throughout 2022. A combination of robust demand following the removal of COVID-19 related restrictions, and a sustained period of tight supply supported the cost of energy throughout Q4 2021. The upward trend has persisted into 2022, with prices more recently exacerbated by the Russia-Ukraine geopolitical conflict, amid further supply concerns, as Russia is a top global exporter of crude oil and natural gas. The concurrence of these factors continues to keep prices well-above average levels, adding significant pressures on the global economy, particularly in the EU, which is heavily reliant on Russian energy sources. There are ongoing fears that rising prices could stunt economic recovery, as inflation rises.

Western countries have introduced sanctions to target Russia’s key commodity export markets and financial institutions. However, Russia is taking advantage of the EU’s dependency on its energy imports, particularly natural gas and crude oil (largely to the EU), to regain value in the Ruble. Due to supply constraints, energy prices are elevated and are expected to remain above 2021 levels while the conflict continues. On the week of the 18^th of May, the price of EU natural gas was up 242% year-on-year (y-o-y) at GBP 211.4/100 therm, whilst the price of crude oil was up 108% y-o-y at USD 108.9/Brl.

Additionally, there are discussions surrounding additional sanctions including a Russian oil embargo by the European Union. Buyers are extremely reactive to new developments surrounding the conflict; thus, the implementation of new sanctions is expected to influence energy prices moving forward. If the EU confirms an embargo on Russian oil, prices are expected to rise further, as supply uncertainty builds up.