The Geopolitical Risks To Watch This Winter

A single attack on oil at this point could send prices to $90, but it will depend on where it is. The markets will weigh certain geopolitical sentiments more heavily than others. And there is plenty to choose from right now, from the Ukraine-Russia intensification and the very quickly quashed Kazakhstan uprising to the long-running Libyan conflict and the ever-present threat of Houthi missile attacks on Saudi Aramco oil installations. 

What would move the needle on oil prices to $90 right now would likely be a clear move by Russia on Ukraine (not just a threatening, ambiguous deployment on the border), or a serious attack on Saudi Aramco’s facilities. 

Libya: Instability already priced-in

In Libya, where December 24th presidential elections were postponed, the markets responded mildly to stoppages at the country’s largest oilfield in mid-December, despite the fact that the shut-in was caused by a clash between powerful factions indicative of a conflict that was never resolved and could at any time return to a state of civil war. The latest proposal is to hold elections at the end of January but to start with parliamentary polls and conclude with presidential elections (the opposite of the original plan). As jockeying for control of Libyan oil and revenues continues to intensify until elections are eventually held, we expect additional politically-based outages. While those outages will move the oil price needle, the impact will not be drastic as the market has already priced in continued Libyan instability. Even another all-out civil war would not have the same impact as some of the other potential geopolitical upsets on the horizon. 

Ukraine-Russia: The NATO-Russia Boundary War

An all-out Russian invasion of Ukraine would provide a geopolitical risk premium even without oilfield shut-ins or a direct impact on oil supplies. But the likelihood of an all-out invasion at this point is not high. More likely is Russian aggression just beyond eastern territories where it already has a foothold (Donbas region), where it absolutely must maintain control and provide a bulwark against any Ukrainian designs to reassert itself there. Russian aggression could drive oil prices higher simply due to uncertainty over the end game here, including NATO’s (read: Washington’s) response, which could theoretically lead to a much broader East-West war. We do not believe that market sentiment is sophisticated enough to respond to the potential for a Russia-NATO war until it is an on-the-ground reality far beyond aggression toward Ukraine. Another Russian occupation attempt on new territory in Ukraine could push oil prices higher, possibly to the $90 range, though some of the uncertainty here is already priced in. (And the NATO-Russia war isn’t limited to this Eastern European battleground: This week, Russia threatened military deployment to Cuba and Venezuela if talks over NATO’s eastward expansion didn’t go its way; the point being to bring things closer to the U.S. backyard.) 

Kazakhstan: The Brief, High-Impact Riot

Protests over fuel prices in Kazakhstan that turned into anti-government riots and were then quashed with the help of Russian troops in a matter of days ended up being a blip on the oil market radar. The market responded with an uptick in oil prices over the uncertainty, which included protests that mildly disrupted Kazakhstan’s oil output. The country extracts some 1.6 million bpd, and the unrest cut production by about 73,000 bdp for a few days but was expected to be back to normal by week’s end. For the markets, this one came out of nowhere in a country that doesn’t usually see such events; and it became violent very suddenly, impacting oil prices. Just because the Russians jumped in and quashed the riots and restored order doesn’t mean this is over. For investors, this stable oil, gas, and uranium environment will be wracked with domestic political and geopolitical uncertainty for some time to come. This isn’t just about protests over fuel prices; this is a battle between the long-ruling Nazarbayev clan and Nazarbayev’s puppet turned nemesis, Kazakhstan’s current President Tokayev. And Russia just threw in with Tokayev, which puts Nazarbayev’s billions at risk and he and his clan are not going to relinquish the power they have easily. 

Saudi Aramco: When the Houthis Get Desperate

Nothing moves oil prices like an attack on the largest producer in the world: Saudi Arabia’s Aramco. In September 2019, a drone attack on Aramco’s processing facilities at Abqaiq and Khurais the country’s east caused oil prices to surge 15% in a day. The implications of an attack on Saudi oil are far greater than developments in the ongoing Libyan conflict, an occupation of Ukrainian territory, or rare high-level unrest in Kazakhstan (though uranium prices will respond more dramatically than oil and gas). At that time, that allowed oil to break above $70. The same today would take it above $90. This would be the real driver of a major oil price increase, and there is real cause for concern. Not only have Yemen’s Iranian-backed Houthi rebels recently stepped up cross-border attacks, but the Saudis are asking their Gulf allies to chip in with more Patriot missiles for defense. For 2022, this is the biggest geopolitical risk premium for oil.