Nearly seven months after Russia’s invasion of Ukraine, Russian oil exports have been quite resilient and just 400,000 barrels per day (bpd) below pre-war levels.
But come December, Russian oil supply could plunge by more than one million bpd after the EU embargo on Russian oil imports by sea enters into force. In February, another one million bpd could then come offline due to the EU’s fuel embargo.
So far this year, Russia has managed to divert a lot of cargoes previously sent to Europe to buyers in Asia, predominantly China and India. As of December – and two months later when the EU oil product embargo kicks in – Russia will have to find a home for 2.4 million bpd of its oil if it is to keep its oil exports at current levels, the International Energy Agency (IEA) said in its Oil Market Report last week.
The global oil market will have to prepare itself for a loss of 2.4 million bpd supply when the EU embargo kicks in; an additional 1 million bpd of products and 1.4 million bpd of crude will have to find new homes. This could result in deeper declines in Russian oil exports and production, the IEA said. The Paris-based agency expects oil production in Russia to fall to 9.5 million bpd by February 2023, which would be a plunge of 1.9 million bpd compared to February 2022.
Around half of the Russian supply that will have to find new buyers could be diverted to Asia and the Middle East this winter, according to research by energy data firm Kpler cited by Bloomberg.
Some 1 million bpd of Russian oil could go to some Middle Eastern countries and Indonesia, Pakistan, and Sri Lanka in Asia, as well as Brazil and South Africa, according to Kpler’s estimates.
If this happens, there would be another major shift in global oil trade flows. Indonesia could replace some of the oil it’s currently importing from OPEC member Nigeria, while Pakistan could import lower volumes of Arab Light, the flagship crude grade of OPEC’s top producer and the world’s largest crude oil exporter, Saudi Arabia, the energy research firm says.
In the Middle East, “The temptation might be to feed Urals into the refineries and let the likes of Arab Light flow freely in Asia,” Kpler notes.
Currently, Europe imports over 1 million bpd of Russian crude, attempting to fill up before the EU-wide embargo on Russian oil imports by sea comes into effect.
Going forward, the EU and the G7 hope to keep Russian oil flows coming with a price cap that would allow maritime transportation services for Russia’s oil if that oil is sold at or below a certain price.
While clever in theory, the price cap plan could lead to much higher oil prices because trade flows will be upended again, tankers are in short supply, and Russian oil exports—still remarkably resilient—would plunge, analysts say.
Yet, Putin can simply make good on his promise to halt all energy supply—including crude, fuels, natural gas, and coal—to the countries that sign up to cap the price of Russian oil. This would tighten the market and send oil prices surging.
“It’s unclear how and where the storm will land, “but it is looming,” Rystad Energy said in research last month.
EU imports of Russian crude are expected to dwindle to just 600,000 bpd by December 2022—a nearly 2.5 million bpd drop from the 3 million bpd before the Russia-Ukraine conflict, the energy research firm said.
Yet, Rystad Energy expects that Russia will be able to redirect a significant portion of crude volume—or 75% in a base-case scenario—to Asia and other markets.
Regardless of how much crude and products Russia manages to place with non-EU buyers later this year, the next disruption of global oil flows is now looming.
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Continuing to expand on OilPrice’s note on the “looming” threat that global oil markets will get even tighter next year because plunging Russian oil output would only mean oil price pain worldwide will be prolonged.
Last month we noted oil prices could be set for a comeback despite “bearish sentiment” amid recession threats as global central bankers aggressively tighten monetary policy to combat the highest inflation in decades.
Goldman Sachs recently told clients its Brent price forecast for this quarter was revised to $110 a barrel, down from a previous projection of $140 per barrel, though the investment bank still believes the case for higher oil prices could materialize in 2023.
Goldman also revised its fourth-quarter Brent price forecast to $125 a barrel from $130 per barrel. As for the 2023 projection, it left prices unchanged at $125 per barrel.
“We believe that the case for higher oil prices remains strong, even assuming all these negative shocks play out, with the market remaining in a larger deficit than we expected in recent months,” the analyst said.
With that in mind, SPR releases are set to end this fall, and OPEC has struggled with spare capacity issues to bring on new production.
This could suggest crude may soon find a bottom.
Fri, 09/23/2022 – 09:25
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Author: Tyler Durden