The Ukraine-Russia crisis threatens to disrupt the entire energy supply chain, impacting several economies across the world, including the European Union. But there is also another side to this evolving story. Oil-producing nations within the GCC are set to grow their revenues because of soaring oil prices caused by uncertainties, fears of a long war, and sanctions on Russia. This, I believe, will be a major talking point in the days to come.
Earlier in March, the prices soared well past $140 per barrel after the US announced an import ban on Russian oil and gas. The EU and the UK followed suit by limiting hydrocarbon imports. Although the volatility has settled to an extent, consumers are looking to actively disengage from Russian oil and gas imports, and are therefore in the market for prospective sellers. Until the Ukrainian crisis comes to a definite halt, oil prices are expected to fluctuate. So, there will be losers and winners, with the OPEC members being the latter.
Windfall profits in the GCC
Oil-producing countries in the GCC and the Middle East may be ideally positioned to capitalize on this situation. As the war in Ukraine rages on, buyers are increasingly looking to switch to Middle Eastern suppliers. More specifically, there is a growing demand for Saudi and Emirati oil, making the situation particularly beneficial to ADNOC and ARAMCO. This is primarily because both countries have, in recent years, emerged as reliable partners in the global supply chain.
In comparison to other markets, Saudi Arabia and the UAE also have a demonstrated ability and capacity to ramp up oil production if the need arises. At this point in time, however, Saudi Arabia is careful about increasing rapid production for several reasons, one of them being its diversification program where a major portion of its crude oil is used in its petrochemical industries. Increasing export volumes greatly and suddenly would deprive the sector of the required raw material. However, I wouldn’t be surprised if the regional economies embrace short-term gains over long-term obligations.
What does the future hold?
OPEC countries, a group of 23 oil-exporting countries, do not intend to increase supply to the market, fearing oversupply and the resulting decrease in oil prices. While there are concerns about drying oil supply if the Ukrainian situation persists, OPEC members have reasons to believe there is ample oil supply in the market at this point in time.
The current crisis is rapidly transforming the behaviour of European consumers who want to, at the very least, break away from energy dependence on Russia. Although it cannot be done overnight, the West is hellbent on doing so in the due course. The entire situation presents Gulf nations with a unique opportunity to gradually increase their exposure to European markets. Saudi Arabia has already started the process and is slowly tapping the Polish market. Just recently, ARAMCO acquired a 30% stake in a Polish refinery in Gdansk, and the Arab country has agreed to additional oil supplies, which will eventually replace a major portion of Russian oil in the Eastern European country. I believe this collaboration will open Saudi Arabia’s access to other markets within Central and Eastern European markets.
The KSA-Poland connection is perhaps a precursor to the larger shift that we could witness in the days to come. But first, there is a pressing need among OPEC members to put the in-fighting to bed and generate consensus over ramping up the supply. If accomplished, it could become a classic case of someone’s loss being another’s gain.
