double threat to global commodity markets

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“The sheer scale of Russian gas cuts to Europe is so significant because they simply cannot replace it with anything in the short term. This is going to force them to make tough decisions like limiting gas consumption to certain sectors, especially large industrial users,” says Hynes.

“Reducing gas to industrial users will ultimately lead to lower industrial production and that doesn’t bode well for countries like Germany. Unfortunately for the rest of the continent and the world, it will likely lead to increased emissions at short term as they turn to fossil fuels to fill this gap.

Silver lining

Hynes adds: “Coal in particular will be in much greater demand, with Germany already looking to restart old coal-fired power stations. And they are also looking to delay the exit from their nuclear industry.

The silver lining of the medium to long-term conflict is that it will likely accelerate investments in renewable energy. In the meantime, energy users must figure out how to bridge the gap.

Liquefied natural gas may play a larger role as the transition progresses because it produces fewer emissions than coal or oil and can be brought into service relatively quickly compared to other energy sources. It could also allow Europe to phase out Russian oil and gas more quickly.

The feat would be significant as Russia produces around 12% of the world’s oil supply. A hit of this magnitude will create big ripples across the industry, and the full implementation of sanctions won’t take effect until the end of the year, Hynes said.

“We have yet to see the full force of these sanctions apply to the oil market and ultimately it will be extremely difficult to replace them,” he says. “Mostly due to lack of investment in new capacity, partly because prices fell as demand weakened just before the pandemic.”

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