March 8, 2022
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The US is set to ban Russian energy exports, as Europe mulls its options over oil and gas.
The US is going to press ahead with a ban on Russian imports of oil, natural gas and coal in response to the country’s aggression in Ukraine as a means of choking off as many avenues as possible for Moscow to finance its war.
Crude oil shot back up towards $130 a barrel, adding to the gains made earlier in the week, as traders and investors panicked about the impact on global energy prices and the economy.
Russia is the third-largest oil producer, behind the US and Saudi Arabia, with around 11 million barrels a day in output. It exports around 7.5 million barrels a day – roughly 7% of total daily demand – and finding enough to replace it, and fast, won’t be easy, if other countries should follow Washington’s lead.
Even without the invasion of Ukraine, the balance between supply and demand was already tight. Indeed, Russia itself on Tuesday warned crude oil could hit $300 a barrel should any kind of ban on its exports come into force.
The US isn’t as dependent on Russian oil as Europe, and imports less than 500,000 barrels per day. But Europe gets around 25% of its oil from Russia, so around 5 million barrels a day.
We look at what a wider ban on shipments of Russian energy might mean.
Buddy, can you spare a barrel?
For starters, the Organization of the Petroleum Exporting Countries would have to agree to increase production much faster than planned, according to Chris Beauchamp, chief market analyst at IG.
“It is likely that the capacity is there, and OPEC might find themselves agreeable if the US can provide the right incentives. This of course is the immediate solution, longer-term other power alternatives need to be created,” he said.
Goldman Sachs estimates that it’s just Saudi Arabia, Kuwait, and the UAE that have spare capacity and could add an additional 2.1 million barrels per day. But this wouldn’t be done overnight.
To replace Russia’s contribution, it would take all of the global spare oil production capacity, the return of more Iranian oil in the market, a ramp-up in US shale output, and demand destruction from high prices, according to Stifel’s natural resources analysts, Chris Wheaton and David Round.
Goldman Sachs believes it will take all these measures, plus the lifting of sanctions on Iran and Venezuela, and releases of strategic government reserves. And even then, the market will be left with no buffer if there are any further supply shocks, the bank said.
Joe Biden, who has made the 2015 nuclear deal with Iran a top foreign policy priority, is under pressure to strike a deal soon to release previously unavailable barrels return to the market. As much as 1.3 million barrels per day could enter global supply fairly quickly, analysts said.
“Politically, an import ban would likely spell the end of Iranian sanctions in order for the US to secure supplies,” Jamie Maddock, an energy analyst at Quilter Cheviot, said. “However, even in an optimistic return of crude oil to the market from Iran, it wouldn’t make up for the lost oil from Russia.”
Impact on Europe
Aside from Russia, Europe gets its oil from Norway, Saudi Arabia, Nigeria, Kazakhstan, Iraq, Algeria, and the US, among others. But it would be difficult to replace Russian supply completely and it’s clearly the most vulnerable region in terms of having to find barrels elsewhere.
“Italy, the Netherlands, France, Romania, and Poland are some of the largest importers of Russian crudes, and many of these countries have continued to receive deliveries that were fixed before the invasion of Ukraine, fulfilling already completed transactions, as the time lag between orders and loadings is usually in 10 or 25-day intervals,” Rystad Energy analyst Louise Dickson said.
An outright export ban on Russian crude from Western countries could wipe out as much as 4 million barrels per day, and participation from China and India would take even more barrels off the market, she said.
Russian Urals is trading at a record discount to the Brent crude benchmark price in Europe, as traders are “self-sanctioning” to avoid getting stuck with cargoes of oil that they then cannot sell.
Impact on Russia
About 60% of Russia’s oil exports go to developed European markets, and another 20% goes to China, according to the International Energy Agency.
Goldman Sachs said in a note Tuesday that China could, in theory, absorb most of the combined 4 million barrels per day in combined US and EU crude imports, not least because the quality of Russian Urals is not dissimilar to the grades Chinese refiners get elsewhere.
But, the problem is less likely to be logistical and more likely to be financial, Goldman said. With the Russian central bank facing severe constraints on access to its foreign currency reserves, including in yuan, China might be reluctant to take more Russian crude.
“Illustrating this point, there are no reports of increased Chinese purchases of Russian crude so far, with China similarly not scaling up imports of Iranian or Venezuelan crude in recent years,” Goldman said.
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