The Wagner rebellion in Russia shocked the world. The oil market reacted with a collective yawn.
Oil prices are, incredibly, lower today than they were before the short-lived uprising in Russia — one of the world’s most important players in the oil market.
The message from the oil market is that the crisis is over. Oil flows from Russia won’t be derailed and the test to Vladimir Putin’s grip on power won’t overshadow investors’ more immediate worry in the US: The economic fallout from Jerome Powell and the Federal Reserve’s war on inflation.
“This is a market that fears Powell more than Putin,” Helima Croft, a former CIA analyst who now heads commodity strategy at RBC Capital Markets, told CNN in a phone interview.
The shift in focus away from Russia is a 180 from last year, when investors arguably overreacted to the mere threat of disruptions to Russian oil from the war in Ukraine and Western sanctions. Oil prices skyrocketed to the highest levels since 2008, only to crash when those threats failed to materialize.
“Now it’s a show-me market as opposed to a tell-me market. Nobody is willing to price in disruption — until it occurs,” said Croft.
US oil prices retreated to around $68.50 a barrel on Wednesday, down from $69.51 a barrel on Thursday before Wagner boss Yevgeny Prigozhin launched his rebellion.
A game-changer for oil?
But some oil market veterans wonder if the pendulum has now swung too far in the other direction. Are investors too complacent about the situation in Russia, even as new details emerge about the extent of the uprising?
“We think the risk of an interruption in Russian supply is rising — even though the market is very sanguine,” said Bob McNally, a former senior energy official to President George W. Bush who is now the president of consulting firm Rapidan Energy Group.
An actual disruption to Russia’s oil flows would be a game-changer for the oil market, and perhaps the world economy. Russia is one of the planet’s leading oil producers and exporters. A loss of Russian barrels would likely spike gasoline prices just as inflation has cooled.
The worry is that the Wagner rebellion made Putin look so weak that he will feel compelled to look strong.
“Most folks assumed Putin was playing a long, patient game here: Grind down the Ukrainians. Sit there for years, if you have to. Use your larger size to crush Ukraine,” McNally said.
“But people are realizing Putin may not be able to afford a long game,” McNally added. “He may need to escalate the war to bring it to a conclusion on satisfactory terms to him. And that poses risks, both direct and indirect, to oil exports.”
‘More deadly tactics’
Of course, a slash-and-burn strategy by Moscow would be risky to Putin, too. It could cost him the support of China and other countries, not to mention support from Russian oligarchs.
Rather than escalate matters, Putin may be hoping to steady his ship and project stability after what amounts to the biggest challenge to his rule since he rose to power.
In that case, the oil market is right to focus more on the health of the economy and the impact from the Federal Reserve’s interest rate hikes.
But Croft, the RBC strategist, said she is concerned the market is underappreciating the risks around Russia.
One concern voiced by Croft is that Putin turns to “more deadly tactics” in Ukraine. The former CIA analyst notes that Prigozhin was highly critical of Moscow’s decision not to use tactical nuclear weapons in Ukraine.
“The war has become background noise to investors. They don’t think about nuclear weapons. It’s outside their frame of reference,” Croft said.
The Libya experience
Of course, if Putin turned to nuclear weapons, there would be much more pressing concerns than the price of gasoline.
Another worry, one that Croft said was voiced over the weekend by US officials, is that Putin would declare martial law. Such a dramatic move could paralyze Russian ports, shutting off supply of not just oil but other key exports like wheat, too.
In 2011, the Obama administration was caught off guard by deep unrest in another oil producer: Libya. That country’s civil war shut down oil export terminals — and even though Libya’s output is much smaller than that of Russia, oil prices shot higher.
Eventually, US officials decided to tap emergency oil supplies, releasing barrels from the Strategic Petroleum Reserve in an effort to ease the disruption and knock oil prices back down that summer.
For now, the oil market is betting there won’t be a repeat of the Libya unrest in Russia.
“Just because the market has shrugged this off, doesn’t mean the risk of a bad scenario has gone away,” Croft said. “Until the risk becomes reality, the market won’t react.”
