While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.
As for oil, we see temporary modest upside pressure...
As for oil, the Ukraine consumes about 300 thousand b/d, of which 220 thousand b/d comes from Russia and 80 thousand b/d is produced domestically. Unlike in the case of gas, however, the Ukraine does not have significant shale oil resources and does not pose a competitive threat to Russian dominance.
Moreover, transit volumes of Russian oil circulating through the Ukraine are rather minor, with the latest Transneft figures estimating normal flows of 300 thousand b/d through the Druzhba pipeline. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control both Azov and Black Sea commerce flows.
These routes are, for now, secure and diverse. Thus, while oil has risen in sympathy with other commodities, we believe the upside risks are rather modest from here unless the conflict escalates.
...unless Western powers get involved, which is unlikely
Moreover, we believe Russia is extremely unlikely to disrupt oil exports to the world, as it would destroy its reputation as a reliable and non-cartelized supplier to the world's largest energy market. Also, oil-related sanctions against Russia are unlikely to happen, as we believe Europe cannot really afford to relapse into a third recession in six years. As nothing meaningful in terms of sanctions came on the back of Russia's conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now, in our view.
If the conflict in the Ukraine turned into a full-blown war and the 1 million b/d of Russian oil flowing through the Black Sea are temporarily disrupted, oil may briefly jump by $10/bbl or more.
With EM currencies weakening by the minute, however, a spike in Brent crude oil prices above $125/bbl would likely increase the risks of recession for a number of weak economies. Consequently, we believe prices would probably reverse back down rather quickly.