Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life. For today’s Soundbites, we speak with Zeba Mirza, a senior research analyst with Foyston, Gordon & Payne, about the situation in Ukraine. Zeba’s a specialist in energy markets. And even though the picture in Eastern Europe is changing by the minute, we took the opportunity on Monday to talk about the potential impact on world oil prices. We talked about the delicate position the rest of the world is in, the potential for global economic disruption, and we started by discussing the difficulty of predicting how this will all play out.

Zeba Mirza (ZM): There is a huge amount of uncertainty. We don’t know what Mr. Putin’s intentions are. We don’t know how far he’s willing to go. We don’t know how long this crisis is going to last. We don’t know how they’re going to respond to the sanctions. What we do know is this is the largest security threat we have faced since World War Two. It’s a paradigm shift from the world we knew. It’s going to change the way we think about global security.

How sanctions are likely to impact Russian oil production and energy-related exports.

ZM: The sanctions which have been imposed are tough. The EU and the U.S., they’ve decided to do basically three things. Number one, they have disconnected some Russian banks from SWIFT [Society for Worldwide Interbank Financial Telecommunication]. Number two, they’ve put sanctions on the Russian central bank and what these bank sanctions will do is they reduce Russia’s access to foreign exchange reserves. Both of these have actually been used in the past, and we know they are effective. And the third thing they’ve done is they’ve expanded the number of Russian officials and oligarchs on the SDN list [Specially Designated Nationals and Blocked Persons List, administered by the U.S. Office of Foreign Assets Control]. So, these sanctions are hard. And the thing is, these sanctions will probably get harder if the military campaign proceeds.

What to expect with regard to oil flows to Europe.

ZM: From an energy perspective, Russia’s energy export holdings are really irreplaceable for global energy markets. They produce close to 9 million barrels a day of oil; they export close to 7 to 7.5. They are the largest gas supplier to the EU. If something was to disrupt these flows, then I don’t think we have the global wherewithal to really offset these. If you look at OPEC, I don’t think they have either the willingness or the ability to do anything about it. The critical thing to remember is that Russia actually is part of OPEC+ [a loosely affiliated entity consisting of the 13 OPEC members and 10 of the world’s major non-OPEC oil-exporting nations] and they are actually helping rebalance the global oil market after the demand destruction which we saw in the pandemic. So, any desire for any member of OPEC to increase supply is complicated by the agreements they have in place. And if any member was to unilaterally increase production, that OPEC+ agreement would unravel. OPEC’s spare capacity is, what, 3.5 to 4 million barrels a day? That is not enough to replace Russia anyway. There’s a large number of people who think Russia also will not want to risk their position as being a reliable global energy supplier. But the truth is the sanctions we placed on them, that does make it harder to transact with Russian companies. So, at some point, if this continues, there might be some disruption in flows.

Why the halt in progress on the Nord Stream 2 pipeline between Russia and Germany is largely symbolic.

ZM: The thing to remember with that is, that is not a flowing pipeline. That is a brand new pipeline. No volumes are flowing. So, while they’ve put that in place, it’s kind of symbolic. There is actually no disruption of energy flows happening, and they haven’t actually gone in to dismantle a pipe. They just said we’re not approving it right now.

And finally, how she’d summarize the situation at this point

ZM: Honestly, I think the world is faced with a balancing act and it’s not an easy one. It’s actually a really tough balancing act because what they’re trying to do — the White House and the EU — they’re trying to sanction Russia without trying to disrupting global energy flows and that is really hard to do. Russia is a significant producer for wheat, for palladium, for ammonia. At some point, this is going to contribute to inflation in a significant way. Food inflation especially. It’s hard to go into a conflict of this magnitude and for the global economy to be exempt from any impact.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Zeba Mirza of Foyston, Gordon & Payne, who ventured her thoughts on a very fluid situation that is continuing to unfold. We will continue to watch the latest developments very carefully. Join us every Wednesday at investmentexecutive.com where you can sign up for our AM newsletter and never miss another Soundbite. Thanks for listening.

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