The European Union is struggling to devise a plan to phase out Russian oil imports that would get the support of all 27 member countries, But Russia persisting with its onslaught of Ukraine, undeterred by multiple rounds of US and EU economic sanctions, is keeping up pressure on the EU to find a way to cut off more of Moscow’s oil revenues.
That, in turn, has kept the oil market’s supply anxiety elevated and benchmark Brent crude futures supported well above $100.
Though prices recorded a weekly loss, the front-month June contract’s $106.65/barrel settle on Friday was well above the $98.48 trough of April 11, which followed the US and fellow IEA members announcing the release of 180 million barrels from emergency oil reserves over May-October.
Germany last week signalled willingness to phase out Russian oil imports by the end of this year. Austria and Hungary are the other countries not in favour of a ban.
French president Emmanuel Macron, who is fighting to be re-elected, has emerged as the most vocal proponent of an oil ban in recent weeks. The move is “necessary”, his Finance Minister Bruno Le Maire said last week. But Le Maire acknowledged that getting all the European partners on board was proving difficult and might take “a few weeks”.
With an outright ban virtually ruled out, the question is, would a gradual and restrained phasing out of imports put enough pressure on Moscow to change its course in Ukraine? It’s a classic catch-22 situation for the EU: What inflicts the most pain on Moscow could also boomerang the hardest.
Brussels is avoiding any measures against Russian gas, which is relatively more crucial for the EU’s energy security, satisfying about 40% of the bloc’s consumption (as opposed to Russian oil meeting 29% of its oil demand).
But any EU move against oil imports also raises the risk of Moscow retaliating by restricting gas supplies. The ongoing disagreements over President Vladimir Putin’s decree requiring EU companies to pay in rubles instead of euros for Russian gas delivered from April 1 are likely to come to a head in the coming weeks, when the payments become due.
Traders’ retreat may lock out more Russian oil
Even if the EU remains undecided on the ban, more Russian supply could be disrupted in the coming weeks.
A set of EU regulations passed on March 15 ban companies from entering into transactions with Russia’s state-owned oil sellers Rosneft and Gazpromneft after May 15, unless “strictly necessary” for bringing fossil fuels into the Union.
The “strictly necessary” clause is somewhat ambiguous, but global trading houses such as Vitol, Glencore, Gunvor and Trafigura are expected to play it safe by scaling back Russian oil purchases.
The first three are headquartered in Switzerland, which has adopted EU sanctions against Russia. Trafigura’s head office is in Singapore but the company does substantial business in Europe and the US.
The traders have been an important conduit for the sale and transport of Russian oil into China and India and their withdrawal is expected to lock more Russian barrels out of the market.
The impending restrictions may explain Rosneft’s rush to offload unusually large amounts of crude through tenders last week. The company offered 37.4 million barrels of Urals loading from the western ports in May and June and 11 prompt cargoes of Siberian Light, ESPO and Sokol loading from the east, according to a Bloomberg report.
Indian refiners, who have ramped up Russian crude imports in recent weeks, balked at Rosneft’s condition of 100% pre-payment on the Urals cargoes based on provisional values and its preference for payment in rubles, and gave the tenders a wide berth.
Russian production drop estimated at 1 million b/d
The exact amount of Russian oil removed from the market remains hard to ascertain.
Some flows are being co-mingled and relabelled, some being redirected into Asia but becoming harder to tally as Chinese buyers become more secretive about spot purchases from Russia, while Indian refiners have switched from open tenders to private negotiations for Russian barrels in recent days.
The market has been looking at tanker movements, unofficial reports from the ground in Russia and satellite images of flaring from the country’s fields and estimated that oil production slumped by a little over 1 million b/d in the first fortnight of April, to around 10 million b/d.
The drop in Russian production will exacerbate the already ballooning shortfall in OPEC/non-OPEC output against its monthly targets.
The 19 OPEC+ members bound by quotas collectively pumped about 39.54 million b/d of crude in March, according to consensus figures from independent news agency surveys, 1.39 million b/d below their target.
Renewed production outages in Libya do not help. The country has lost an estimated 500-600,000 b/d of output or nearly 50% of its capacity, since last weekend, thanks to protestors disrupting operations at oil fields and export terminals.
CPC resumption, demand pressures loom
A resumption of Kazakhstan’s CPC Blend crude loadings after a month-long outage should alleviate the market’s supply tightness. Two of the three single-point moorings at the Russian Black Sea port of Novorossyisk that had been damaged by storms have been repaired and were expected to be returning to operations. The two SPMs will enable crude loadings to return to normal, Kazakh Energy Minister Bolat Akchulakov last week. The oil comes from Kazakhstan’s Kashagan and Tengiz fields through the Caspian Pipeline Consortium pipeline, which moved an average of 1.5 million b/d in February.
If the release of SPR barrels and the restart of CPC Blend exports from Novorossyisk gives the market a breather from supply worries, the softening demand picture will come back into view, adding to the downward pressure on prices.
The World Bank as well as the International Monetary Fund last week slashed their projections for 2022 global GDP growth. Chinese oil demand is looking shaky as Beijing pursues its zero-Covid strategy and US consumption is in a plateau below corresponding 2019 levels. The strengthening US dollar is eroding the purchasing power of buyers around the world holding other currencies. The second half of the year may prove to be contrast to the first half’s bull market.
The writer is Founder and CEO of Vanda Insights, which provides macro-analysis of the global oil markets.
