How the Shunning of Russian Oil Leaves a Hole in the Market

(Bloomberg) --

While the U.S. and U.K. have banned imports of Russian oil, sanctions punishing Russia for its invasion of Ukraine have mostly not targeted its energy exports. Nevertheless, Russian crude is being shunned in what some traders are calling “self-sanctioning.” Because of confusion about what’s legally permitted, fears about how the European Union might join its allies in turning away from Russian energy and concern about reputational damage, banks are pulling financing, buyers are holding back and tanker operators are reluctant to ship. The squeeze has started to have the same effect as a wider embargo. Since Russia is the world’s second-biggest crude exporter, it’s leaving a big hole in energy markets, sending the price of oil rocketing. 

1. What’s causing the disruption? 

With financial sanctions on Russia imposed by the U.S., U.K. and EU, market participants including tanker owners are wary of taking trades with Russian counterparties, even if the energy market itself has been largely exempted. That’s a killer blow for Russian oil, a mainstay of the country’s economy, with almost two-thirds of its crude sales moving by ship. Some traders are also mindful of negative publicity. Shell Plc’s purchase of Russia’s flagship Urals grade crude on March 4 was criticized by Ukraine’s Minister of Foreign Affairs Dmytro Kuleba on Twitter as smelling of “Ukrainian blood.” Four days later, the company said the decision was “wrong” and that it would make no new purchases of Russian oil and gas. BP Plc matched that commitment, and they were joined by Paris-based TotalEnergies SE on March 22. 

2. What’s the impact on prices? 

Global benchmark Brent crude surged above $100 a barrel in the days after the Feb. 24 invasion, swinging wildly in the weeks that followed but remaining at an elevated level. The oil market went into a frenzy and moved into one of the biggest so-called backwardations on record -- where contracts for more immediate supply are priced much higher than those for later deliveries. Prices of other fuels saw even bigger jumps, notably the cost in Europe of natural gas and of diesel, which faced the prospect of shortages.

3. How much oil is being shunned? 

It’s hard to say, leaving energy traders watching shipments and pipeline throughput with heightened interest. On March 16, the International Energy Agency, which represents key industrialized countries, estimated that Russia’s oil output could slump by a quarter in April as buyers turn away from the nation’s exports, inflicting the biggest supply shock on the market in decades. Although many buyers, especially former European purchasers, announced that they won’t trade Russian crude, Asian buyers may be stepping in to take barrels at discounted rates. China’s refiners are discreetly purchasing cheap Russian oil, traders say, and Indian processors have also scooped up some of the volumes. Russia has been exporting approximately 5 million barrels a day of crude, the equivalent of about 5% of global consumption, as well as nearly 3 million barrels daily of refined products -- key fuels such as diesel, fuel oil and a petrochemical feedstock known as naphtha. 

4. What are the U.S., U.K. and EU doing? 

On March 8, President Joe Biden said the U.S. will ban imports of Russian fossil fuels including oil. Crude from Russia made up about 3% of U.S. imports last year. The U.K. ban, announced the same day, will be phased in over the rest of the year, and applies to all imports of Russian oil as well as refined products; the U.K. relies on Russia for about a third of its diesel imports. The U.K. measure won’t apply to natural gas. For the EU, the stakes are even higher, and the bloc was divided on supporting an embargo on Russian crude. Germany, Poland and Hungary are among those most exposed to any loss of Russian oil, as they have refineries depending on deliveries via pipeline from the nation. 

5. What could plug the hole?

The IEA announced plans on March 1 to deploy 60 million barrels from stockpiles around the world. Half of that amount will come from the U.S. Strategic Petroleum Reserve, with the rest from members in Europe and Asia, according to details released by the IEA. The planned release equates to about 17 days’ worth of frozen Russian crude shipments and additional volumes may be made available. IEA member countries hold nearly 1.5 billion barrels of government-controlled oil stockpiles. 

6. Could more oil come from other sources?

There are several possible sources of additional supply. There are hopes that Iran could inject oil into the market, should world powers succeed in their efforts to secure a new agreement with the country limiting its nuclear program in exchange for the U.S. lifting sanctions that have restricted its oil exports. There is also spare capacity in the U.S., where producers have been limiting growth in recent years under pressure from investors. The U.S. has also been in talks with Venezuela, signaling a possible major shift in the U.S. approach to the socialist government. So far, the Organization of the Petroleum Exporting Countries and its allies have declined to accelerate their output. At a meeting in early March, the group stuck with the modest 400,000 barrel-a-day production increase it had earlier scheduled for April.  

7. What are the implications for Russia’s energy industry?

Biden’s administration has said it’s seeking to degrade Russia’s status as a leading producer of oil and natural gas by restricting exports of technology related to the energy sector. Some of the world’s largest oil companies, including Exxon Mobil Corp., BP and Shell, have pledged to exit Russia, reducing capital available for investments. TotalEnergies said it wouldn’t dump operations in Russia for now but will no longer provide capital for new projects there. It owns roughly a fifth of gas producer Novatek PJSC as well as a large interest in the Yamal LNG project, Russia’s biggest producer of liquefied natural gas.

8. What’s happening with Russian gas exports?

While oil shipped from one country can to some extent be replaced with barrels sourced from elsewhere, natural gas imports are harder to substitute. That’s because there’s a huge infrastructure network that relies on piped supplies from Russia. The alternative, cargoes that are cooled into a liquid and delivered by ship, cannot come close to compensating. As a result, Russian gas is still being sent by pipeline to Europe, which relies on Russia’s state-run energy giant, Gazprom PJSC, for about a third of all gas consumed. On March 23, gas futures surged again after Russian President Vladimir Putin demanded “unfriendly” nations pay for gas in rubles, bringing back fears about the stability of Russian supplies.  

9. Does Europe have longer-term options?

Potentially, yes. The European Commission, the executive branch of the European Union, is working to accelerate measures to try to wean the bloc off Russian gas, although some would take years to implement. In a report, the IEA said the EU could, without compromising its climate ambitions, reduce Russian gas imports by a third by sourcing more of the fuel from other countries, accelerating the rollout of renewable energy and ramping up efficiency. Proposed measures include increasing electricity derived from nuclear power and replacing gas boilers with electric heat pumps. 

The Reference Shelf

• A March 22 compilation of comments from companies shunning Russian oil supply and operations.
• A set of graphics on how Russia’s war in Ukraine is choking the world’s supply of natural resources.
• Related QuickTakes on the roots of the Ukraine war, Europe’s dependence on Russian gas, and what LNG could do to replace Russian gas.
• A Bloomberg Opinion column by Javier Blas on how the oil market is struggling to fill a Russia-sized hole.

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