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A general view of the Gazprom Neft oil refinery is seen in Moscow September 20, 2012. (MAXIM SHEMETOV/REUTERS)
A general view of the Gazprom Neft oil refinery is seen in Moscow September 20, 2012. (MAXIM SHEMETOV/REUTERS)

Business Briefing

Europe and Russia have ‘a gun to each other’s head’ with oil as a weapon Add to ...

These are stories Report on Business is following Tuesday, March 18, 2014.

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Over a barrel
While the Ukraine crisis promises to escalate, analysts believe all sides will hold back from using the “oil weapon.”

The United States and Europe unveiled a package of “sanctions-lite” yesterday, as The Globe and Mail’s Joanna Slater and Eric Reguly report from New York and London.

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Seen as modest, the moves are aimed at Russian and Ukrainian officials, rather than blunt economic measures.

While there may well be further sanctions, observers believe the governments involved will stay away from the crucial oil market.

“The crisis is far from over,” said Michael Wittner of Société Générale’s commodities group.

“The key point for the oil markets is that, in sharp contrast to Iran, Europe and Russia have a gun to each other’s head which should prevent either side from using the oil weapon and stopping oil trade flows,” he added in a report.

Based on last year’s data from the International Energy Agency, Mr. Wittner noted that Russian oil accounted for 36 per cent of net crude imports to OECD countries in Europe last year. When you add in other energy products such as natural gas liquids, that rises to 44 per cent.

Look at it the other way: Shipments of oil to those countries accounted for 71 per cent of Russia’s crude exports.

“If Europe is heavily dependent on Russia, Russia is even more dependent on Europe,” said Mr. Wittner.

“Europe needs the oil and Russia needs the money,” he added.

“So logic and rational reasoning strongly argue that neither the Europeans (backed by the U.S.) nor the Russians should use the oil weapon, because the self-inflicted pain would be as bad as the pain inflicted on the side. Of course, history is full of examples where conflicts escalated because of emotion, miscalculation, and bad intelligence.”

The strategic reserves of IEA countries, Mr. Wittner noted, could last a year at a “drawdown rate” equivalent to the amount of oil Europe imports from Russia.

“That is a lot of reserves … but there are also many other potential disruptions out there.”

Toll mounts
The economic toll from a labour dispute at Vancouver’s port is mounting.

Now, Bloomberg reports, northern Alberta pulp mills might have to suspend business temporarily because of the walkout by truckers at Port Metro Vancouver.

“In the latter part of this week we would expect our operations to be impacted,” James Gorman, the chief of the Council of Forest Industries, told the news agency, referring to the backlog.

“Probably we would take down northern Alberta operations first.”

The strike has been ongoing for several weeks now.

Factory sales climb
Canada’s factories scored an impressive gain in January as sales climbed 1.5 per cent, marking the biggest increase in almost a year.

There’s more beneath the surface, however: This came as inventories rose across the board by 3.6 per cent, Statistics Canada said today, and actual volumes accounted for less than half of the increase.

Notable was the 6.7-per-cent rise in inventories in the aerospace and related parts sectors, the fastest increase since the summer of 2012. That was partly because the bulk of inventories in that industry are in U.S. dollars, which rose against the Canadian currency, the federal agency said.

Sales rose in 12 of 21 industries measured.

“Still, when put in the context of the dive in real shipments in December, we’re still below November levels, and for that matter, real manufacturing shipments are also below levels reached in early 2012. The weaker C$ has helped more on prices (translating goods priced in US$ terms into more C$s) than on volumes thus far.  One good month does not a trend make, at least not yet.”

The inventory-to-sales ratio climbed to 1.42 in January from December’s 1.39, while unfilled orders increased by 4.8 per cent, again largely due to the aerospace industry.

“A good deal of the January bump was price related, but real volumes were up a solid 0.7 per cent, and nominal shipments were up in most categories,” said chief economist Avery Shenfeld of CIBC World Markets.

Inflation tame
The U.S. central bank began a two-day meeting today just as a fresh reading showed there’s nothing by the way of inflation to move the needle.

On a monthly, seasonally-adjusted basis, consumer prices in the United States inched up 0.1 per cent in February from January, leaving an annual inflation rate of just 1.1 per cent, down from 1.6 per cent in January, our Washington correspondent Kevin Carmichael reports.

So-called core prices, which strips out volatile items and helps guide the Federal Reserve, increased 1.6 per cent.

When the Fed’s meeting ends tomorrow, the central bank is expected to announce another cutback in its bond-buying stimulus program.

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