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World

Germany Drops Opposition to Embargo on Russian Oil

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BERLIN—Germany is now ready to stop buying Russian oil, clearing the way for a European Union ban on crude imports from Russia, government officials said.

Berlin had been one of the main opponents of sanctioning the EU’s oil-and-gas trade with Moscow.

However on Wednesday, German representatives to EU institutions lifted the country’s objection to a full Russian oil embargo provided Berlin was given sufficient time to secure alternative supplies, two officials said.

The German shift increases the likelihood that EU countries will agree on a phased-in embargo on Russian oil, with a decision possible as soon as next week, diplomats and officials say. However, how quickly the bloc ends its Russian oil purchases, and whether it also uses measures such as price caps or tariffs, is still being negotiated. The U.S. is pressing its European allies to avoid steps that could lead to a protracted increase in oil prices.

Europe’s debate on banning Russian oil has shifted decisively in recent days with Germany and some other countries taking practical steps to replace Russia with other suppliers. Some member states remain cautious about the economic impact of an oil embargo, including Hungary, Italy, Austria and Greece, diplomats say. All 27 EU governments must approve an oil ban.

The oil moves come as EU nations scramble to help member states Poland and Bulgaria make up for a natural gas shortfall after Russia stopped deliveries this week in reaction to what it said was the two countries’ refusal to pay for imports in rubles. The Kremlin demands EU buyers pay into special bank accounts where deposits would be converted from euros and dollars into rubles.

The EU pays state-controlled Russian firms around €1 billion, equivalent to $1.05 billion, a day for energy, according to estimates by Bruegel, a Brussels-based think tank. Critics have said that these funds are bankrolling Russian President

Vladimir Putin’s

regime and its war in Ukraine.

The consequences of harsh economic sanctions against Russia are already being felt across the globe. WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict might transform the global economy. Photo Illustration: Alexander Hotz

On Thursday, Gazprom PJSC, Russia’s biggest gas producer, said profit soared in 2021 on the back of higher gas and oil prices.

Senior officials from EU member states discussed oil sanctions at length on Wednesday and the European Commission, the EU’s executive body, will hold further discussions with EU countries in coming days before presenting a proposal probably early next week, officials and diplomats say.

U.S. Treasury Secretary

Janet Yellen

said last week that a full European oil embargo on Russia would push up international oil prices, hurting a fragile global economy, and might “actually have very little negative impact on Russia,” which would benefit from higher oil prices on its remaining exports. She suggested Europe could keep buying oil while restricting Russia’s access to payments, echoing talk in Europe of making payments into an escrow account.

The EU imports between 3 million and 3.5 million barrels of oil a day from Russia, sending just under $400 million in payments daily, according to Bruegel. That amounts to some 27% of EU oil imports. Oil and gas revenues accounted for 45% of Russia’s federal budget in 2021, according to the International Energy Agency.

Many companies have been self-sanctioning, according to analysts and traders, avoiding trade in Russian oil over reputational concerns and the risk that the Western pressure campaign could soon encompass Moscow’s energy exports. That is already contributing to a sharp fall in Russian oil exports, according to the IEA.

EU officials designing the next sanctions proposals have to factor in that it will take some European oil refineries time to adapt to receive non-Russian crude. They also acknowledge that for countries such as landlocked Hungary, which receives its Russian oil through pipelines, adjusting to a Russian oil embargo will be complex.

The bloc is considering the option of combining a gradual phaseout of oil purchases with more immediate measures to reduce demand or cut payments to Moscow, such as a price cap or a tariff on oil imports. Another possibility is to phase out shipped oil purchases quickly and pipeline deliveries more slowly.

“There are all sorts of things that we’re running through,” said a senior EU official. “The aim is to hit the Russians as hard as possible while at the same time minimizing” the cost.

While Germany has swung behind the idea of phasing out Russian oil purchases, Berlin remains skeptical of price caps, tariffs and proposals to put Russia’s oil payments into escrow accounts.

German officials doubt that Mr. Putin would maintain oil deliveries if the EU unilaterally cut the price it pays, and they caution that Russia could easily sell its oil to other customers such as India and China instead of accepting a lower European price.

Berlin’s change of mind on oil came after it struck a deal with Poland that will enable Germany to import oil from global exporters via the Baltic Sea port of Gdansk, officials said Wednesday.

The Polish port is located close to the PCK oil refinery in Schwedt, Germany, which is controlled by the Russian oil giant

Rosneft

and receives crude via a Russian pipeline known as Druzhba, Russian for friendship.

The Gdansk port infrastructure, which is equipped to receive oil supertankers, is connected to the Russian pipeline with a separate link operated by Poland. This means oil imports to Gdansk could be immediately channeled through the pipeline to the Schwedt refinery, replacing Russian supplies, government officials said.

Oil imports to Gdansk, Poland, could be channeled to the Schwedt refinery, replacing Russian supplies.



Photo:

Michal Fludra/Zuma Press

The Schwedt refinery was the biggest obstacle to Germany accepting a ban on Russian oil imports because thousands of jobs in the region depend on it and there was no alternative supply to feed it until now, the officials said.

The Polish deal was necessary because the German port closest to the refinery, Rostock, doesn’t have the capacity to receive supertankers. In addition, Germany’s railways no longer operate oil wagons. The landmark deal was announced on Wednesday by German Economy Minister

Robert Habeck

during a visit to Poland.

Some 12% of Germany’s oil consumption relies on Russian imports, down from 35% before the war, Mr. Habeck said in a video statement posted on his ministry’s social media. He said Germany was now ready for the possibility that Rosneft would stop channeling oil, a scenario he said would no longer spell disaster for the German economy.

“Rosneft is a Russian state company and they have no interest in processing non-Russian oil,” Mr. Habeck said.

Should Rosneft refuse to process non-Russian oil imports, Germany could put the refinery under state management under laws protecting strategic assets. Berlin has already assumed stewardship of the main Russian gas-trading hub in Germany, a subsidiary of Russia’s state-controlled Gazprom.

Write to Bojan Pancevski at bojan.pancevski@wsj.com, Laurence Norman at laurence.norman@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

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US

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

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Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of

Saudi Arabian Oil Co.

, known as Aramco.

Russia’s attack on Ukraine helped push the price of oil to over $100 a barrel for the first time since 2014. Here’s how rising oil costs could further boost inflation across the U.S. economy. Photo illustration: Todd Johnson

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince

Mohammed bin Salman’s

pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President

Xi Jinping

to visit later this year.

Saudi Foreign Minister Faisal bin Farhan met Chinese Foreign Minister Wang Yi in China in January.



Photo:

Anonymous/Associated Press

Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.

It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.

By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.

“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.

“China has been offering everything you could possibly imagine to the kingdom,” the official said.

More on Relations Between the U.S., Saudi Arabia and China

A senior U.S. official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.

It is possible the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily.

Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.

Some officials have cautioned Prince Mohammed that accepting payments for oil in yuan would pose risks to Saudi revenues tied in U.S. Treasury bonds abroad and the limited availability of the yuan outside China.

The impact on the Saudi economy would likely depend on the quantity of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.

“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.

The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.

“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”

Talks with China over pricing oil in yuan started before Prince Mohammed, the de facto leader of the kingdom, made his first official visit to China in 2016, people familiar with the matter said. The crown prince asked the kingdom’s then-energy minister

Khalid al-Falih

to study the proposal, the people said.

Mr. Falih instructed Aramco to prepare a memo that heavily focuses on the economic challenges of switching to the yuan pricing.

“He really did not think that was a good idea but he could not stop the talks as the ship had already sailed,” said another person familiar with the meetings.

Saudi officials in favor of the shift have argued the kingdom could use part of yuan revenues to pay Chinese contractors involved in mega projects domestically, which would help mitigate some of the risks associated with the capital controls over the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.

Another official familiar with the talks said yuan pricing could give the Saudis more influence with the Chinese and help convince Beijing to reduce support for Iran.

Ali Shihabi, who sits on the board of Neom and formerly ran a pro-Saudi think tank in Washington, said the kingdom can’t ignore China’s desire to pay for oil imports in its own currency, particularly after the U.S. and EU blocked the Russian central bank from selling foreign currencies in its reserves stockpile.

“Any doubts countries had about the need to diversify into Yuan and other currencies/geographies would have ended with that huge step,” Mr. Shihabi tweeted in response to this article.

—David S. Cloud contributed to this article.

Write to Summer Said at summer.said@wsj.com and Stephen Kalin at stephen.kalin@wsj.com

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Business

Natural Gas Prices Are Surging. Here Are the Stocks to Tap the Rally.

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Royal Dutch Shell operates a plant in Qatar, known as Pearl GTL, that transforms natural gas into liquid fuels.


Stuart W. Conway/Shell International Limited

Text size

Natural gas has long been oil’s poor step-cousin, a commodity that many ignore until they have to pay their heating bill.

Now, natural gas is the lead player in a drama that is gradually dragging down the world economy. A surge in the price of the commodity—along with other fuel sources, like coal and propane—is forcing countries to reduce factory production, and could drive heating and electricity prices sky-high this winter.

Analysts have already been downgrading global growth forecasts based on the energy crunch. Goldman Sachs recently forecast that China wouldn’t grow at all in the third quarter versus the prior quarter, in part because of its energy problems. In the United Kingdom, power companies serving nearly two million people have gone out of business.

In the U.S., natural-gas futures rose above $6 per million British thermal units (BTUs) during the week, nearly quadrupling from their pandemic lows. Oil demand is rising with gas, as some utilities are likely to switch their input fuel to oil as gas stays expensive.

The problem is even more acute in places that have to import more of their fuel. Europe and Asia are bidding up the cost of liquefied natural gas, or LNG, to secure enough for winter. European gas prices have roughly quadrupled from their five-year average, and were recently trading at a record $32 per million BTUs, according to S&P Global Platts Analytics. The Asian benchmark price hit an all-time high of $34 on Thursday.

There is no simple answer for why multiple energy sources are expensive and scarce today. A cold spell late last winter in Europe led to low levels of gas in storage. U.S. producers, which account for the largest share of gas production in the world, have held back on drilling new wells as they work to get their balance sheets in line after years of overspending. The Chinese economy had been rebounding, causing demand to surge just as supplies were running low. And the prices of other commodities such as coal have been rising too, making it difficult for power producers like utilities to switch their input fuels. Oil and gas have also been beset by the same problems facing all global markets—too few workers to move the fuel.

Climate change’s role in the power crunch is also tricky. Carbon emissions are leading to more severe weather that is damaging energy infrastructure. One reason oil and gas supplies are low now is that Hurricane Ida damaged infrastructure in the Gulf of Mexico, taking substantial supplies off line.

But combating climate change also brings challenges. The transition to cleaner fuels hasn’t always gone smoothly. One reason European power prices have increased is that the wind simply didn’t blow enough in recent weeks to power turbines that make up a growing portion of the Continent’s power supply.

“There will be two parties in this debate,” says Daniel Yergin, an expert in energy markets who is vice chairman at IHS Markit. “One is saying let’s go faster, and the other is saying you’re going too fast. Don’t constrain investment when you don’t really have sufficient alternatives to replace what you’re constraining.”

For investors, the power crunch opens up new opportunities. It could be months before the market comes back into balance. A cold winter could lead to even higher prices that would not only sap economic growth but possibly cause political upheaval.

The obvious beneficiaries would seem to be natural-gas producers. But it isn’t quite so simple, in part because most producers have already hedged their 2021 production and most of their 2022 output at lower prices. “Any of the hedges even for next year are well under $3,” says Truist Securities analyst Neal Dingmann.

He thinks that investors can still get natural-gas exposure, and benefit from rising oil prices too, by purchasing stocks of oil companies that also happen to be large gas producers.

Among those are


Cimarex Energy

(ticker: XEC), which won shareholder approval this week to merge with


Cabot Oil & Gas

(COG). Cabot is unhedged on 2022 production as of its latest earnings report. Similarly, dry natural gas and natural gas liquids account for nearly half of production at


Marathon Oil

(MRO), which also has reported relatively few hedges for this year and next, Dingmann says.

Larger oil companies tend not to hedge production, either. Among the biggest beneficiaries could be


Royal Dutch Shell

(RDS.B), a major producer of propane, whose prices have also skyrocketed, Dingmann notes. “In the third quarter, I think people are going to be very surprised” by how much these companies make from gas, he says.

Another way to play these dynamics is to invest in companies that are key cogs in the global supply system, like


Cheniere Energy

(LNG), whose terminals on the Gulf Coast allow U.S. gas to be processed and shipped overseas. Small-cap


Tellurian

(TELL) offers exposure to the same theme, though it is more speculative.

“It’s excellent for LNG companies,” says Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “There was concern that there was overinvestment in LNG as recently as two years ago.” No longer.

Some petrochemical companies could benefit, too. Chemical plants need natural gas to run. Those with operations in the U.S. are in better shape because they’re paying relatively less, notes Rich Redash, the head of global gas planning at S&P Global Platts. That could benefit


Dow

(DOW) and


LyondellBasell Industries

(LYB). b

Write to Avi Salzman at avi.salzman@barrons.com

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Business

White House Urges OPEC to Boost Oil Output Amid Covid-19 Economic Recovery

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WASHINGTON—The White House urged OPEC to boost oil production Wednesday, saying recent planned increases are insufficient as countries around the world seek to emerge from the Covid-19 pandemic.

National security adviser Jake Sullivan said in a statement that recent planned production increases by the Organization of the Petroleum Exporting Countries would “not fully offset previous production cuts” made by OPEC and its oil-producing allies during the pandemic.

“At a critical moment in the global recovery, this is simply not enough,” Mr. Sullivan said.

Brent crude, the international oil benchmark, fell 0.8% to $70.04 a barrel after the White House announcement. Oil prices have experienced volatility in recent days due to concerns over the Delta variant of Covid-19.

In July, OPEC and a group of Russian-led oil producers agreed to unleash millions of barrels of crude over the next two years, committing to restore all the cuts they made at the start of the Covid-19 pandemic. The group chose to move gradually, with monthly installments of new oil through the latter end of 2022.

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Business

OPEC, Allies Agree to Boost Output, Betting on Demand Rebound

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OPEC and an alliance of other top oil producers agreed to boost their collective production by more than two million barrels a day over coming months, betting on resurgent demand as they and the rest of the world assess the economic consequences of the pandemic’s trajectory.

The Organization of the Petroleum Exporting Countries and a group of other big producers led by Russia agreed to boost output in May by 350,000 barrels a day, and by the same amount again in June, according to delegates. They agreed to then increase output by another 450,000 barrels a day in July. Saudi Arabia, meanwhile, agreed to start easing separate, unilateral cuts of one million barrels a day that it put in place earlier this year. It plans to end those cuts altogether by the end of July, delegates said.

The agreement Thursday between the two groups, together called OPEC+, was a compromise between Saudi Arabia, OPEC’s de facto leader, and Russia. Saudi Arabia had sought to maintain cuts, skeptical of a quick return in oil demand during the pandemic. Russia, meanwhile, has said the world already needs more oil to feed resurgent economies in many regions.

The decision is another sharp swerve in OPEC’s zigzag oil strategy over the past year, underscoring the difficulty among forecasters in the group—and elsewhere—to call the start of a sustained global recovery from the pandemic.

Ahead of the meeting between the two groups, Saudi Arabia had initially backed plans to keep production unchanged, delegates said. The decision to hike output “was a complete U-turn,” one of them said. Throughout the pandemic, the group has appeared to shift sharply from optimism to pessimism over the prospects of a post-pandemic economic recovery—and a strong rebound in oil demand. Saudi Arabia has pushed to stay cautious, while Russia has been eager to lift output.

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World

Saudi Arabia Set to Raise Oil Output Amid Recovery in Prices

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Saudi Arabia plans to increase its oil output in the coming months, reversing a recent big production cut, say advisers to the Kingdom, a sign of growing confidence over an oil-price recovery.

The world’s largest oil exporter surprised oil markets last month when it said it would unilaterally slash 1 million barrels a day of crude production in February and March in an effort to raise prices.

But the Kingdom plans to announce a reversal of those cuts when a coalition of oil producers meet next month, the advisers said, in light of the recent recovery in prices. The output rise won’t kick in until April, given the Saudis already have committed to stick to cuts through March.

The advisers cautioned the plans still could be reversed if circumstances change, and the Saudis’ intention hasn’t yet been communicated to the Organization of the Petroleum Exporting Countries, said the people and OPEC delegates.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency,” Prince Abdulaziz bin Salman, the Saudi energy minister, said at a conference Wednesday. “The uncertainty is very high, and we have to be extremely cautious.”

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