Ukraine’s best defence against Putin’s energy war is more attacks on Russia’s oil refining sector

The conflict between Russia and Ukraine has intensified into an energy war, with Russia escalating attacks on Ukraine's power and gas infrastructure, significantly damaging generation capacity ahead of winter. Concurrently, Ukraine is striking deep into Russia, impacting an estimated 10-15% of its refining capacity, leading to over 10% petrol price increases and forcing Moscow to subsidize oil companies to maintain domestic stability. This escalating energy warfare, characterized by Russia's increased drone and missile production and Ukraine's strategic counter-strikes, introduces considerable geopolitical risk and volatility to regional energy markets.

Analysis

The conflict has intensified into an energy war, with Russia escalating attacks on Ukraine's energy infrastructure, launching nine massed attacks since early October. These strikes have damaged or destroyed up to 9 gigawatts of coal-fired and hydropower plants, approximately 15% of Ukraine's pre-war generation capacity, and annihilated around 60% of its gas production facilities. This aggressive strategy aims to increase hardship ahead of winter, despite Ukraine's investments in asset hardening and repair capabilities.

Concurrently, Ukraine has ramped up its deep-strike capabilities, targeting Russian energy infrastructure, including oil refineries. Ukrainian drone strikes have reportedly hit over 50% of Russia’s 38 major refineries, disabling an estimated 10-15% of its refining capacity. This has led to Russian petrol prices rising over 10% by October, creating domestic pressure on Moscow to subsidize oil companies and maintain price stability.

Russia continues to increase its military production, with Shahed-type drone output now over five times higher than a year ago and ballistic missile output estimated to have increased by 66%. This poses a significant challenge for Ukraine's limited air defenses, exacerbated by the cost advantage of Russian missiles over Western interceptors. The overall sentiment is strongly negative, with a high market impact score, indicating sustained geopolitical risk and volatility in regional energy markets.

Key Decisions for Investors

• Monitor sustained volatility in global energy markets, particularly for crude oil and natural gas, given the ongoing infrastructure targeting by both belligerents.
• Assess potential for increased demand and pricing power for defense contractors specializing in air defense systems and munitions, considering Russia's increased production and Ukraine's defense needs.
• Factor in elevated geopolitical risk premiums across commodity markets, especially those tied to Eastern European supply chains, as the energy war intensifies.