Ukraine’s AI drone attacks on oil refineries threaten energy markets

Ukraine’s campaign of attacks on Russian oil refineries demonstrates how relatively cheap drones using artificial intelligence could pose a major threat to global energy markets.

Drones launched by Ukraine have hit 18 Russian oil refineries this year, with a combined capacity of 3.9 million barrels per day, according to a report released by JPMorgan earlier this month. According to the bank, some 670,000 b/d of Russian refining capacity is currently offline due to strikes.

Ukraine’s capabilities are growing, with its drones now demonstrating significantly longer range. Earlier this month, kyiv struck Russia’s third-largest oil refinery, Taneco, located 1,300 kilometers – about 800 miles – from the front lines, according to JPMorgan.

Ukraine is increasingly using AI-enabled drones, which help weapons navigate and avoid jamming, according to the bank.

“AI directives also provide strike precision, maximizing the impact of strikes by targeting specific areas like distillation towers, whose repairs require Western technology,” said Natasha Kaneva, head of global strategy of raw materials at JPMorgan, to its clients in the April report. “This makes repairs expensive and often requires equipment that the country is not able to produce.”

US Defense Secretary Lloyd Austin made clear on Tuesday that the Biden administration was concerned about the strikes, in a rare public display of disagreement with US allies in kyiv.

“These attacks could certainly have repercussions on the global energy situation,” Austin told the Senate Armed Services Committee. “Frankly, I think Ukraine has an interest in going after tactical and operational targets that can directly influence the ongoing fight.”

The United States has urged Ukraine to stop attacks on Russian energy infrastructure, fearing they could drive up crude oil prices and spark retaliation from Moscow, the Financial Times told the Financial Times last month. three people close to the discussions.

Russian refining capacity losses could worsen as Ukraine aims to build a full-fledged drone industry and produce one million units in the country this year, according to the JPMorgan report. If kyiv manages to extend the range of drones to 1,500 kilometers (about 932 miles), they could potentially hit 21 refineries with more than 4.4 million b/d of refined capacity, according to the report.

“It is possible that this will become a more serious problem because we rely on Russian supplies in the global market, which allows other non-Russian supplies to flow to other places,” said John Kilduff, energy expert and founder. partner at Again Capital.

The deployment of AI drones also has broader implications for global energy markets, according to Bob Brackett, senior research analyst at Bernstein. Drones are inexpensive to produce compared to the millions of dollars in damage they can cause and could allow non-state actors to challenge superior combat forces, Brackett told clients in a Friday memo.

“These drones can easily and asymmetrically disrupt global maritime commerce,” Brackett wrote, warning that oil exporters like Russia are not the only countries to worry. Oil importers, such as China and India, will now have to worry about disruptions to crude flows due to drone attacks, he said.

Ukraine’s drone strike campaign comes just as tensions are high in the Middle East, with OPEC members Iran and Israel now on the brink of direct confrontation.

U.S. crude has risen nearly 20% this year, while global benchmark Brent has gained 17% as wars in the Middle East and Eastern Europe rage amid growing demand for crude and tightening of supply. Gasoline futures have jumped about 33% year to date.

Bob McNally, president of Rapidan Energy, said drone strikes are not currently a major problem for oil prices because attacks on refineries mainly affect Russian diesel production at a time when the market is already saturated .

But Russia is also a major exporter of a gasoline feedstock called naphtha. If naphtha markets were to tighten due to the attacks, it could impact gas prices and balances, said McNally, who served as a top energy official in the George W. Bush administration.

Goldman Sachs said in a research note last month that the strikes were bullish for diesel prices, but the impact on crude oil was mixed. Outages can lead to reduced demand for oil from refineries, which is bearish for prices. But the market fears that Ukraine will increasingly suffer impacts on oil production and transportation infrastructure, which would weigh on Russian crude exports, according to Goldman.

Bart Melek, head of commodities strategy at TD Securities, said the current strikes could have an indirect effect on oil markets. As Russian fuel exports decline due to the attacks, countries that rely on those exports must then source their fuel from refineries in other countries, Melek said. These refiners need more crude to meet demand, which can strain oil supplies, he said.

Russian production is already a problem for the Biden administration. Moscow has pledged to cut its oil production and exports by an additional 471,000 barrels per day in the second quarter to meet its commitments to OPEC+.

These cuts could push the price of Brent crude to $100 by September, putting pressure on the Biden administration just before the presidential election, according to a JPMorgan report last month.

The investment bank expects U.S. gas prices to reach $4 a gallon by May, the highest level since summer 2022.

“There are few issues that terrify a sitting U.S. president more in an election year than soaring gasoline prices,” Rapidan’s McNally said.