Welcome to this week’s Great Game which follows in the footsteps of our overall energy and oil theme this week. In this piece, we will dive into some of the hotspots and political drivers behind the developments in the oil markets, both short-term and long-term.

Tanks and Threshers

Last week, markets were stunned by the Russian decision to cut off exports of diesel, marine fuels and other fuels. Was this a political move or a simple necessity? Who are the targets and what is the long-term plan here? It’s always tricky to understand Putin’s strategy, but here’s my take:

The Russian Army has burned A LOT of diesel during the summer while maneuvering troops around to counter Ukrainian attacks. The Russian Tanks obviously swallow diesel like exchange students swallow Jägerbombs, but transport trucks, mobile artillery pieces and trains are major consumers as well. The logistics of running a 300,000-man army is not to be sneezed at. But still – could Russia, one of the world’s largest oil producers, really be running out of diesel? Well, maybe so. Of course, the Russians have all the oil they need, but their refinery capacity is not geared for a large-scale war while Russia keeps up exports. Even though most European nations proudly reject Russian oil and fuels, most of them still import quite a lot of Russian oil products through India, Kyrgyzstan, Turkey or other countries. So Russia has to keep its tanks and trucks running while still keeping up deliveries on Russia’s absolute key export good. And even if the Ukrainian summer offensive may be dying out, we are now looking into the Russian harvest season. Hundreds of thousands of tractors, threshers, harvesters and whatnot have begun burning diesel like crazy and that may have driven the Kremlin to the decision to stop diesel and fuel exports. Not necessarily because they were running out, but simply to shield the enormous Russian agricultural sector from potentially skyrocketing fuel prices – all while keeping the Russian army supplied and moving. We have been hearing reports of localized fuel shortages across the front line and many instances of fuel rationing. That is crippling to any modern army although can better be mitigated when you’re on the defensive like the Russians are. It will, however, most likely deter the Russians from any offensives in the fall until they get the fuel situation under control again. While I expect Russia to keep up this export cut for as long as they need to, there is obviously an end date. Russia’s economy can’t hold up without oil and fuel exports, so naturally, they will at some point need to begin exporting again. The same logic applies to Saudi Arabia and their oil production cuts, but that’s for another piece.

Chipping away at the Support for Ukraine

The political motive is obvious as well. As mentioned, Europe still consumes its fair bit of Russian fuels and an export cut is a needlestick move to push up European prices at the pumps even further.