The Russia-Ukraine war remapped the world’s energy supplies, putting the U.S. at the top for years to come
Russia’s invasion of the Ukraine a year ago has shifted global energy supply chains and put the U.S. clearly at the top of the world’s energy-exporting nations.
As Europe struggled with threats to its supply of natural gas imports from Russia, U.S. exporters and others scrambled to divert cargoes of liquified natural gas from Asia to Europe. Russian oil has been sanctioned, and the European Union no longer accepts Moscow’s seaborne cargoes. That has resulted in a surge in U.S. crude and refined product shipments to Europe.
“The U.S. used to supply a military arsenal. Now it supplies an energy arsenal,” said John Kilduff, partner at Again Capital.
Not since the aftermath of World War II has the U.S. been so important as an energy exporter. The Energy Information Administration said a record 11.1 million barrels a day of crude and refined product were exported in the week ended Feb. 24. That is more than the total output of either Saudi Arabia or Russia, according to Citigroup, and compares with 9 million barrels a day a year ago.
However, exports averaged about 10 million barrels a day over the four-week period ended Feb. 24. That compares with 7.6 million barrels a day in the year-ago period.
“It’s amazing to think of all those decades of concern about energy dependence to find the U.S. is the largest exporter of LNG and one of the largest exporters of oil. The U.S. story is part of a larger remapping of world energy,” said Daniel Yergin, vice chairman of S&P Global. “What we’re seeing now is a continuing redrawing of world energy that began with the shale revolution in the United States. … In 2003, the U.S. expected to be the largest importer of LNG.”
Yergin said the changing role of the U.S. oil and gas industry in the world energy order will be a topic of conversation among the thousands attending the annual CERAWeek by S&P Global energy conference in Houston from March 6-10. Among the speakers at the conference are CEOs from Chevron, Exxon Mobil, Baker Hughes and Freeport McMoRan, among others.
“One of the ironies, from an energy perspective, is if you only looked straight back, where we were the day before the invasion … if you look at price, you would say not much has happened,” said Daniel Pickering, chief investment officer at Pickering Energy Partners. “The price of global natural gas spiked but came back down. Oil is lower than where it was before the invasion. … The reality is we certainly have set in motion a rejiggering of global supply chains, particularly on the natural gas side.”
According to the Department of Energy, the U.S. has been an annual net total energy exporter since 2018. Up to the early 1950s, the U.S. produced most of the energy it consumed, but in the mid-1950s the nation began to increasingly import greater amounts of crude and petroleum products.
U.S. energy imports totaled about 30% of total U.S. consumption in 2005.
“There’s a global LNG boom that has become much more apparent and visible to the market,” said Pickering. “We’ve shifted around who consumes what kind of crude and products. We’ve meaningfully changed where Russian oil moves to.”
India and China are now the biggest importers of Russia’s crude. “You look at those things, and to me, we very clearly adjusted the way the world is thinking about supply for the next four or five years.”
But a year ago, when Russia invaded Ukraine, it was not clear that the world would have sufficient supply or that oil prices would not spike to sharply higher levels. That is particularly true in Europe, where supplies have been sufficient.
RBC commodities strategists said there were a number of factors at play that helped Europe get by this winter.
“A combination of warm weather, mandated conservation measures, and additional supplies from alternative producers such as the United States, Norway and Qatar, helped stave off such a worst-case scenario for Europe this winter,” the strategists wrote. “Countries that had relied on low cost Russian gas to meet their economic needs, such as Germany, raced to build new LNG import infrastructure to prepare for a future free from Moscow’s molecules.”
But they also point out that Europe is not in the clear, especially if the military conflict continues. “Key gas producers have warned that it could be difficult for Europe to build storage this summer in the absence of Russian gas exports and a colder winter next year could cause considerable economic hardship,” the strategists added.
Qatar has promised to send more gas to Europe, and the U.S. is building out more capacity. “In gas, we’re going to be a very real player. We’re trustworthy. We have rule of law. We have significant resources, and our projects are reasonably quick, compared to a lot of other potential projects around the world,” said Pickering. “My guess is we will go from [capacity of] 12 [billion cubic feet] of exports a day to close to 20, and we will be a big supplier to Europe.”
Pickering said U.S. exports are currently around 10 Bcf a day.
Among the companies he finds attractive in the gas sector are EQT, Cheniere, Chesapeake Energy and Southwestern Energy.
The oil story is different. Pickering said the U.S. industry chose not to be the global swing producer. “We’re not the swing producer because we decided not to be with our capital discipline,” he said.
Energy companies now have earnings visibility that they did not have before, and that could be the case for another five years or so, Pickering said. Oil companies have not been overproducing, as they had in the past, and they did not jump in to crank up production despite calls from the White House in the past year.
The White House has also been critical of the energy industry’s share repurchase programs, which many have.
“They’re generating a lot of cash. They’re being rewarded by shareholders for being disciplined with that cash,” Pickering said. “You did see companies signal their optimism, like with Chevron’s $75 billion share repurchase.”
“The Russia, Ukraine dynamic may have ushered in an era where it’s cool to bash big oil, but my expectation is you can bash all the way to the bank and the political dynamic is very different than the financial and economic dynamic,” he said.
The U.S. now produces about 12.3 million barrels of oil a day, and Pickering does not expect that number to race higher. Producer discipline has helped support their share prices. The S&P energy sector is up 18% over the past 12 months, the best-performing sector and one of just three of 11 sectors that are showing gains. The next best was industrials, up 1.7%.
“Our absolute production levels are as high as they’ve been when you combine oil and natural gas. We were a net importer, and we’ve dramatically reduced that. It’s a massive shift,” said Pickering. “The shale boom benefited the energy sector. It benefited U.S. consumers. It was a terrible stretch for producers. They did their jobs too well. They overproduced. When we went from 5 million barrels a day to 13 million barrels a day, we were taking the most barrels away from OPEC. That was when we were most influential. We were the swing producer.”