The Wagner Group’s attempted coup over weekend in Russia cast some doubt over Russian President Vladimir Putin’s political power, and raised uncertainty surrounding the production outlook for the one of the world’s biggest oil producers.
The rebellion saw the mercenary paramilitary force, led by Yevgeny Prigozhin late Friday, take over Russia’s southern military headquarters in Rostov-on-Don.
The group marched largely unchallenged toward Moscow, halting their advance around 120 miles short of the capital of Moscow Saturday before Prigozhin abruptly stood down in a deal that would exile him to Belarus, with charges against him of leading an armed rebellion dropped.
Read: Putin calls armed rebellion by mercenary chief a betrayal and vows to punish its leaders
Oil prices saw modest support in the wake of the developments. Futures for U.S. benchmark West Texas Intermediate oil
CL.1,
CLQ23,
saw its August contract trade at $69.19 a barrel on the New York Mercantile Exchange in Monday dealings, up 3 cents for the session, while global benchmark Brent crude for August delivery
BRN00,
BRNQ23,
edge up by 16 cents, or 0.2%, to $74.01 a barrel on ICE Futures Europe.
For now, crude prices remain “indecisive,” said Matt Smith, lead oil analyst, Americas, at Kpler. “Ongoing developments in Russia are likely to keep prices choppy and on tenterhooks over the coming days.”
Supply and sanctions
The possibility of an open civil war and rebellion in southern Russia raised concerns about oil supplies, but those have receded for now, said Michael Lynch, president of Strategic Energy & Economic Research. “It never appeared as if the rebellion would spread to society more generally, even though signs of support showed up in various places.”
Still, supply is a key concern with Russia among the world’s largest producers of oil.
As the Russia-Ukraine war evolved, oil prices have dropped considerably — “in no small part because Russia has been able to sidestep sanctions and keep exporting strong volumes of its oil and products to the market,” Smith told MarketWatch.
So the events of recent days have ratcheted up the potential for supply disruptions, something that wasn’t a consideration before the weekend, he said.
In April, the country’s exports of crude and refined oil products climbed to 8.3 million barrels a day — the highest since Russia’s invasion of Ukraine in February 2022, the International Energy Agency said in its May oil report.
Russia exports of around 8 million barrels a day would represent roughly 8% of global oil demand, said Jay Hatfield, chief executive officer at Infrastructure Capital Management. “If there was a full-scale rebellion in Russia that disrupted production that would likely cause a huge spike in global oil prices.”
On the other hand, “the bigger impact of an end of the Ukraine war and sanctions would be on the European natural-gas market as exports from Russia are likely to resume,” he said.
‘Shockwaves’
Indeed, Russia has managed to surprise in terms of the amount of its exports despite sanctions.
Where the exports of Russia’s oil barrels go has changed, but not the amount of exports, said Peter McNally, global sector lead for industrials materials and energy at Third Bridge.
Western countries have slowed or stopped importing Russian oil, but buyers in China, India, and the Middle East have all increased their purchases of those barrels, he said. And regardless of who is running the country, Russia needs to export its oil to keep the government and country running.
The last 16 months have shown “resilience in Russian oil supply despite sanctions and war,” said McNally.
“A civil war in Russia may raise the potential for “the types of ‘shock waves’ that could throw the oil market into turmoil.””
If internal strife in Russia were to lead to some kind of civil war, then “we could be looking at the potential for the types of ‘shock waves’ that could throw the oil market into turmoil,” he told MarketWatch.
There’s currently no indication of such a scenario, but that would lead Russia to become a “failed state” and weigh on the country’s ability to supply global oil markets, McNally said.
He points out, however, that global supplies of crude oil and refined products are a lot higher than when the Russia-Ukraine war began early last year.
There’s “more of a buffer in the system today to manage any potential short-term disruption,” McNally said.
‘Closer’ end to Russia-Ukraine war?
Lynch, meanwhile, told MarketWatch that longer term, there’s “a weakened Russia and weakened Putin, which could mean that some end to the Ukrainian hostilities is closer.”
That scenario would “almost certainly be bearish for oil prices, as even if sanctions aren’t ended, they will be increasingly ignored,” said Lynch.
Putin may also become “more aggressive in seeking higher oil revenues to keep the elites and populace happy.”
That could mean closer cooperation with Saudi Arabia, though it appears more likely to result in less adherence to production quotas, he said.
Earlier this month, OPEC+, which is made up of the Organization of the Petroleum Exporting Countries with de facto leader Saudi Arabia, and the group’s allies — including Russia — agreed to extend previously agreed production cuts through the end of 2024. Saudi Arabia also said it would voluntarily cut its own oil production by an additional 1 million barrels a day in July.
Short term, Lynch sees some bullishness for oil prices, but longer term — possibly in the next three to six months — he believes the market should see more oil from Russia and a more bearish outlook for prices.
“The anticipated market tightening in the second half [of the year] would certainty be moderated at the least,” said Lynch.
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