The World May Need That Russian Oil Output Cut After All

Comment

The world is about to lose a lot of Russian crude when EU sanctions and a US-led price cap come into effect in 29 days. This may not be a bad thing.

How big could the loss be? Perhaps much less than many fear.

EU countries will halt most Russian crude oil imports by sea on December 5, and pipeline flows to Poland and Germany will be halted until the end of the year. Shipments to Europe have now halved what they were before Vladimir Putin sent troops to Ukraine in February, with most going to China, India and Turkey.

Depending on how successful Moscow is in finding new buyers — its crude oil tanker just unloaded at the Reuss refinery in Abu Dhabi, potentially opening a new outlet — EU sanctions could cut the flow by up to 700,000 bpd. to give Pipeline deliveries to Poland and Germany last year were about 650,000 barrels per day. Therefore, the total volume directly reaches a maximum of about 1.35 million barrels per day.

A bigger concern is that a ban on providing shipping, insurance and other services to the Russian oil trade could reduce flows to non-European countries, where much greater volumes are at stake. But it is more likely that they will simply divert the trade to non-European ships insured in Russia or the buyer’s country.

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The price cap – supported by the United States – is intended to create a safety valve that allows buyers access to European shipping and insurance if the price they pay for cargo falls below a yet-to-be-determined level. continue

I doubt it has any real effect. The countries that have signed this ceiling have also banned the purchase of Russian crude oil. Buyers who have not participated are reluctant to do so. Russia has repeatedly said that it will not sell oil to countries that have capped its prices, and that there is no penalty for avoiding the US initiative.

Russia’s remaining buyers may enjoy marginal negotiating leverage, but that’s due to a reduction in the volume of refiners willing to process Moscow crude, not a cap. China, India and Turkey, now the biggest buyers of Russian crude oil, are not jeopardizing trade to please Washington.

So I don’t think the flow of Russian crude oil to non-European countries will be affected by the sanctions.

The world may find it much easier to cope with the loss of up to 1.35 million barrels per day of Russian crude oil than feared when the sanctions were first proposed. He might actually welcome it.

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On the supply side, production cuts by the OPEC+ group of oil producers, of which Russia is a major member, will not be anywhere near the 2 million bpd figure they announced last month. Most analysts estimate the actual decline to be around half that level. I think the decline could be even lower after you’ve been able to recover production in Kazakhstan and Nigeria, which will offset the actual production cuts that will probably only be made by Saudi Arabia, Kuwait and the United Arab Emirates.

On the other side of the balance, oil consumption is falling, affected by high prices, a strong US dollar and the determination of central banks to fight rampant inflation, even at the cost of economic growth.

This is not just my view. “We’re going to see a decline in demand over the next few months,” said Russell Hardy, chief executive of the world’s largest independent oil trader, the Vitol Group. Ed Morse, head of global commodity research at Citigroup, said oil demand is slowing around the world.

The reopening of China’s economy could change that picture, but Friday’s hopes for an easing of China’s Covid restrictions may be premature, according to Bloomberg data.

The International Energy Agency, which now sees global oil demand in the current quarter 300,000 barrels per day less than the same period last year, has reduced its forecast for next year’s consumption by 550,000 barrels per day.

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To balance supply and demand, the world will need 29 million bpd of crude oil from OPEC members in the coming months, even with the loss of 1 million bpd of Russian supply since December. With the slight improvement in Nigeria’s production, which is already underway, this is almost exactly what the group is likely to achieve if its members do not exceed their new targets.

If Russian supply does not decrease, the crude oil market looks oversupplied in the coming months.

More from Bloomberg Opinion:

• Russia’s Big Concern Is Finding Oil Buyers: The Elements by Julian Lee

• How the US and the Saudis can overcome the latest OPEC+ dispute: Hossein Ibish

• Vladimir Putin’s Guide to Alienating Allies: Clara F. Marks

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist at Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Studies.

More stories like this are available at bloomberg.com/opinion

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