Ukraine resumed drone attacks on Russian oil refineries in early July after a brief hiatus. Initially, these attacks garnered significant attention and were linked to potential rises in oil prices. However, attributing price increases solely to these incidents oversimplifies the complex dynamics at play.
The Drone Strategy
Since the beginning of the year, Ukraine has successfully targeted Russian oil refineries with drone strikes. According to the International Energy Agency’s (IEA) April Oil Market report, Ukrainian drones have damaged 11 Russian refineries. In July, Ukraine expanded these attacks, which has intensified their impact on Russia’s fuel supply chain.
Russian refineries are crucial for supplying fuel to Russian troops stationed in occupied Ukrainian territories. Disruptions in fuel supply present logistical challenges for Russian forces, reminiscent of the difficulties that contributed to the hasty withdrawal of Russian troops from near Kyiv in March 2022.
The Russian government is trying to manage fuel prices while grappling with the financial strain on its budget. If disruptions persist, Russia may have to increase oil-product subsidies, placing additional strain on federal finances. Energy sanctions further complicate Russia’s efforts to restore refinery capacities, as they limit export revenue and block the supply of essential equipment.
Limited Impact on Global Oil Markets
Despite the heightened media coverage and international interest, the actual impact of Ukrainian drone strikes on global oil prices has been minimal. The ICE low sulfur gasoil futures have remained relatively stable despite the resumed attacks.
Several factors, including ongoing geopolitical tensions in the Middle East, extended output cuts by OPEC+, and a surge in global oil demand, are more influential in shaping the global oil market. According to the latest Russian Oil Tracker by the KSE Institute, Russian oil exports saw only a slight decrease to 7.7 million barrels per day (mb/d) in May. IEA data indicates a noticeable increase in crude exports from Russia between March and May 2024.
Russia’s contribution to the global gasoline supply is relatively minor, at just 0.7 percent of the total. Even with a ban on gasoline exports, the impact on global prices is expected to be minimal, as other suppliers can easily fill the gap. However, Russia’s role in the global diesel market is more significant, accounting for over seven percent of the total supply. A sharp decline in diesel exports might temporarily affect refinery margins and pump prices, but this effect is anticipated to be short-lived due to increased refinery activities in countries such as India, Turkey, and those in the Middle East.
Russian Response and Market Dynamics
In response to the drone attacks, the Russian government initially reintroduced a six-month ban on gasoline exports starting in March. Refineries were also required to increase the proportion of diesel fuel sold on the stock exchange. By the end of May, the Russian government temporarily lifted the gasoline export ban to prevent overstocking, as domestic supply met demand.
By the end of June, Russia had largely restored the refinery capacities damaged by drone strikes. Meanwhile, Ukraine shifted its focus to attacking oil depots near the frontline. The broader geopolitical implications of Russia’s response highlight a significant shift: Russia, traditionally an energy exporter, is now forced to import petroleum products to meet domestic demand. This reliance on neighboring countries for fuel underscores vulnerabilities exposed by the drone attacks.
Recent trends indicate a consistent decline in oil and gasoline prices, suggesting that the impact of Ukrainian drone attacks on Russian refineries in the spring of 2024 has been limited. Nonetheless, Ukraine’s drone strategy is compelling the Russian regime to make difficult policy decisions, thereby increasing the overall cost of the conflict.
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