Muted market response to Russian mutiny, but tail risks remain

The Wagner mutiny over the weekend lasted less than 24 hours, with Yevgeny Prigozhin seemingly heading into exile in Belarus. But we are not in the same position now as we were on Friday. The key change is that the future risk of regime change has increased substantially, with Putin’s grip on power now appearing weaker. While the future outlook is uncertain, below we look at some key tail risks that could arise to the two key exports of gas & oil:

  1. A future coup / civil war could further reduce energy exports in the near term:
    • Direct risk of infrastructure damage; risk likely to be higher for oil, given low pipeline gas flows to Europe and the remoteness of LNG terminals
    • Instability risk of supply disruption even without direct infrastructure damage
  2. A new regime could negotiate higher gas exports to Europe
    • The market is not pricing a material increase in Russian supply, so the impact would be large, especially across the tighter 2023-25 period
    • Europe will continue pursue its LNG strategy to ensure greater security of supply, but additional Russian imports from a friendlier regime over the next 3-5 years could be welcomed as a source of price relief
  3. Gas volatility has fallen precipitously since the panicked markets and liquidity constraints of last summer; any changes in Russian supply may challenge that decline.

It is likely this saga has not seen its conclusion. We will look at these tail risks in more detail in a feature article in the next few weeks, clashing them against our gas supply & demand framework introduced in our recent webinar.