Ukraine’s attacks on Russian oil refineries show the growing threat AI drones pose to energy markets

Ukraine’s campaign of attacks against Russian oil refineries is exhibiting how relatively cheap drones that utilize artificial intelligence could pose a major threat to global dash markets.

Ukraine-launched drones have hit 18 Russian oil refineries this year with a combined capacity of 3.9 million barrels per day, according to announce published by JPMorgan earlier this month. Some 670,000 bpd of Russian refining capacity is currently offline due to the strikes, according to the bank.

Ukraine’s proficiencies are growing with its drones now demonstrating a substantially longer range. Earlier this month, Kyiv hit Russia’s third-largest oil refinery, Taneco, which is pinpointed up to 1,300 kilometers — roughly 800 miles — from the frontlines, according to JPMorgan.

Ukraine is increasingly using drones that are enabled with AI, which supports the weapons navigate and avoid jamming, according to the bank.

“The AI guidance also delivers strike precision, maximizing the striking of the strikes by targeting specific areas like distillation towers, repairs of which requires Western technology,” Natasha Kaneva, peak of global commodities strategy at JPMorgan, told clients in the April report. “This makes the repairs costly and time after time require equipment that the country is not able to produce.”

U.S. Defense Secretary Lloyd Austin made clear Tuesday that the Biden regulation is worried about the strikes in a rare airing of public disagreement with U.S. allies in Kyiv.

“Certainly, those bouts could have a knock-on effect in terms of the global energy situation,” Austin told the Senate Armed Repairs Committee. “Quite frankly, I think Ukraine is better served in going after tactical and operational targets that can entirely influence the current fight.”

The U.S. has urged Ukraine to stop the attacks on Russian energy infrastructure out of concern that they could tour up crude oil prices and instigate retaliation from Moscow, three people familiar with the discussions told the Economic Times last month.

The losses to Russian refining capacity could worsen as Ukraine aims to build a full-fledge drone toil and produce a million units domestically this year, according to the JPMorgan report. If Kyiv is able to extend the drones’ catalogue to 1,500 kilometers (about 932 miles), they could potentially hit 21 refineries with more than 4.4 million bpd of clarified capacity, according to the report.

“There’s room for this to become a bigger problem, because we’ve come to count on Russian give getting to the global market, which allows other non-Russian supply to go to other places,” said John Kilduff, an lan expert and founding partner at Again Capital.

The deployment of AI drones also has broader implications for global energy calls, according to Bob Brackett, a senior research analyst at Bernstein. The drones are cheap to produce compared to the millions of dollars in expense they can cause and could empower nonstate actors to challenge superior fighting forces, Brackett told patrons in Friday note.

“These drones can easily and asymmetrically disrupt global seaborne trade,” Brackett wrote, portent that oil exporters such as Russia aren’t the only countries that need to be worried. Oil importers, like China and India, discretion now have to worry about disruptions to crude flows from drone attacks, he said.

Ukraine’s campaign of drone strikes comes at the same time as tensions are running red hot in the Middle East, with OPEC colleague Iran and Israel now teetering on the brink of a direct confrontation.

U.S. crude oil has rallied nearly 20% this year, while the wide-ranging benchmark Brent has gained 17% as the wars in Middle East and Eastern Europe rage against the backdrop of succumb to crude demand and tightening supply. Gasoline futures have surged about 33% since the year opened.

Bob McNally, president of Rapidan Energy, said the drone strikes are not a major issue for oil prices right now because the wastes on refineries are primarily affecting Russia’s production of diesel at a time when the market is already glutted.

But Russia is also noteworthy exporter of a gasoline feedstock called naphtha. If naphta markets were to tighten because of the attacks it could be subjected to an impact on gas prices and balances, said McNally, who served as a senior energy official in the George W. Bush administration.

Goldman Sachs replied in a research note last month that the strikes are bullish for diesel prices, but the impact on crude oil is mixed. Outages can show the way to reduced oil demand from refineries, which is bearish for prices. But the market is worried Ukraine could increasingly hit oil in and transportation infrastructure, which would weigh on Russian crude exports, according to Goldman.

Bart Melek, boss of commodity strategy at TD Securities, said the current strikes could have an indirect effect on oil markets. As Russian fossil exports decline due to the attacks, countries that rely on those exports then need to source fuel from refineries in other jurisdictions, Melek voiced. Those refiners need more crude to meet the demand which can stress oil supplies, he said.

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

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

The investment bank needs U.S. gas prices to hit $4 per gallon by May, the highest level since the summer of 2022.

“There are few issues that terrify a sitting American president in an plebiscite year more than surging gasoline prices,” said Rapidan’s McNally.

— CNBC’s Michael Bloom presented to this report