The leaders have, however, refrained from sanctioning Russia's pivotal energy sector, presumably because it would throw an already tight global energy market into further disarray. But you wouldn't tell that by looking at the oil markets right now.
Oil prices and energy stocks are trading at multi-year highs after international refiners adopted a self-imposed embargo, with many reluctant to buy Russian oil and banks refusing to finance shipments of Russian raw materials. Refiners and banks are unwilling to do business with Russia due to the risk of falling under complex restrictions in different jurisdictions. Market participants are also concerned that measures directly targeting oil exports could soon come into place as fighting in Ukraine escalates.
"It's going to make trading with Russia very complex. These sanctions against Russia will have an incredible effect on global trade and trade finance," Sarah Hunt, a partner at law firm HFW who works with commodity traders, has told the Wall Street Journal.
The situation is getting desperate for the Russian oil sector, with oil exports falling sharply despite selling at massive discounts. According to Energy Intelligence, Russian oil export flows have fallen by at least one-third - or some 2.5 million barrels per day - despite a discount of $11 per barrel versus dated Brent being offered for distressed cargoes of Russian Urals.
Russia normally exports 4.7 million b/d of crude and 2.8 million b/d of products, according to government data. But Energy Intelligence now estimates that ~1.5 million b/d of crude and 1 million b/d of refined products are not making it to the market.
Other than the sanctions, European refiners are also reluctant to buy Russian oil due to its high sulfur content. Refiners prefer lighter grades since they need less treatment with expensive natural gas, thus allowing for higher margins.
Russian Energy Sanctions Coming
Things could get even dicier for global oil and gas markets with reports of bipartisan calls for a ban on imports of Russian oil and gas to the U.S. A bipartisan push for the U.S. to stop importing oil from Russia is gaining steam with the introduction of two bills. Both Democrats and Republicans are in agreement that the U.S. should stop bringing in Russian oil, with Republicans pushing for increased U.S. drilling, while Democrats are advocating a switch to clean energy.
Oanda's Ed Moya told CNBC that "Brent crude could surge to $120 if the oil market starts to think it is likely that sanctions will be placed on Russian energy" in reaction to Russia's invasion of Ukraine.
Energy Aspects' chief oil analyst Amrita Sen was even more aggressive with her prediction, telling CNBC that "We're going to go to $150, even higher than that because the only solver right now in this market is demand destruction,". She estimated that ~70% of Russian crude oil exports "can't be touched" for now because of banking sanctions.
The U.S. imports a significant amount of Russian oil but is not highly dependent on the country for its supplies.
According to data by the American Fuel and Petrochemical Manufacturers (AFPM) trade association, the U.S. imported an average of 209,000 barrels per day (bpd) of crude oil and 500,000 bpd of other petroleum products from Russia in 2021. That works out to just 3% of U.S. crude oil imports and 1% of the total crude oil processed by U.S. refineries. By contrast, the U.S. imported 61% of its crude oil from Canada, 10% from Mexico, and 6% percent from Saudi Arabia in the same year. U.S. imports of Russian crude oil have increased since 2019 after the country imposed sanctions on Venezuela's oil industry. U.S. refiners also temporarily boosted Russian imports last year after Hurricane Ida disrupted oil production in the Gulf of Mexico.
According to Adam Pankratz, a professor at the University of British Columbia's Sauder School of Business, a complete ban on Russian oil and gas imports would not disrupt the country's supply that much but would still hurt in other ways.
"If the US stopped importing Russian oil, that would mean that likely many other countries would also no longer be importing Russian oil, and that would make a very tight oil market already much tighter, and that would drive up the price of oil and that in turn can drive inflation, which in turn can affect the US economy," Pankratz has told Al Jazeera.
The latest economic data revealed that U.S. inflation surged to a four-decade high of 7.5%, prompting Federal Reserve Bank of St. Louis President James Bullard to advocate for a supersized rate hike. The Ukraine crisis could also lay to waste forecasts by Fed Chair Jerome Powell and other policymakers that inflation might begin to cool naturally as Federal stimulus and congressional aid to the economy fade and supply chain bottlenecks ease.
Currently, higher energy costs present the biggest risk of further boosting U.S. inflation from its four-decade high, which is bad for the American economy, with consumer confidence hitting the skids. A University of Michigan survey showed that consumer confidence slipped 8.2% from January to February, with fewer consumers planning to purchase homes, automobiles, or go on vacation over the next six months amid concerns about the short-term economic outlook.
Indeed, there are fears that the U.S. economy could even slip into a recession.
Diane Swonk, chief economist at Grant Thornton, estimates that the U.S. economy can weather six months of oil prices averaging around $100, although it could worsen the inflation problem, but a sustained period of $125-a-barrel oil would almost certainly stall growth and lead to rising unemployment.