Demand shift expected from looming drop in the European consumption of Russian oil will in the week begin to reshape forces in the market, and probably propel a new direction in prices.
According to the International Energy Agency (IEA) which provides market intelligence for the European economic bloc the major international trading houses in Europe will have to halt all transactions with state-controlled Rosneft, Gazprom Neft, and Transneft from Sunday, May 15, 2022.
Analytical notes from industry consultancy firm, Rystad Energy, confirmed weekend that European traders might by Sunday stop deals on purchase of oil from the Russian state oil firms unless where it becomes “strictly necessary” for the continent’s energy consumption security.
Analysts from the company said EU traders would cease their purchase of oil from Russian state owned firms beginning this week as the Western economic bloc nears consensus on slamming sanctions on the country over its invasion of Ukraine and sustaining a genocidal war against a European state.
According to market pundits surveyed by The Oracle Today, sanctions on Russia would take double toll: low crude oil export and cuts in refinery activity and export of fuel products. Both would demand drastic cuts in crude oil production by the world’s second largest producer.
Russia’s pre-war production stood at over 11 million barrels per day, and its crude oil export was at about 7.0 million barrels per day.
According to estimates from the International Energy Agency (IEA), Russia’s crude oil production could drop to its lowest level since 2004 if the EU imposes an embargo on the country’s oil imports. The agency stated that oil embargoes would force Russia to shut in more production.
The IEA said: “Russia’s isolation following its invasion of Ukraine is deepening as the EU and G7 contemplate tougher sanctions that include a full phase out of oil imports from the country. If agreed, the new embargoes would accelerate the reorientation of trade flows that is already underway and will force Russian oil companies to shut in more wells.”
The IEA said Russia’s oil supply losses could expand to around 3 mb/d during the second half of the year from a decline level of nearly 1 mb/d in April.
Russia itself has admitted that its oil production could drop by 17 percent this year due to the sanctions, TASS news agency reported, citing Finance Minister Anton Siluanov. In April alone, oil production fell by 9 percent from March.
Rystad predicts that “as a result of both the sanctions and a drop in domestic demand and refinery activity, we believe Russia will produce 1.5 million bpd less oil and lease condensate in May compared to pre-invasion of Ukraine levels.”
Besides, Rystad also noted, “an EU embargo, if fully enacted, could take about 3 million bpd of Russian oil offline, which will completely disrupt, and ultimately shift global trade flows, triggering market panic and extreme price volatility.”
Again, an extensive range of Russian barrels are at risk in terms of global supply, with possible 4.5 million bpd at risk of dropping off the market.
Rystad noted that extended Covid-19 lockdowns in China, rising cases elsewhere, and fiscal policy decisions to combat soaring inflation are giving the markets reason to be skittish.
It pointed out that downside risks continue to materialize out of China due to residual impacts from the Covid-19 shutdowns and depressed oil consumption, and flattish refinery intake.
“GDP weakness out of China would put additional downward pressure on prices, while lockdown-induced supply-chain shortages could provide random bullish momentum down the road,” Rystad stated in notes to clients.
The prediction that Russia was losing its biggest customers is expected to weaken the position of the country in the global supply influence and also wipe of significant market value from its crude grades which have been already weakened to huge discounts to limited buyers.
Europe’s diversion of demand from Russia this week is expected to inevitably alter the flow of supply, and probably cause imbalances in demand for crude oil grades that match plant configurations for refineries in the industrialized continent.
Whereas India’s opportunity in taking huge Russian exports at discounted rates frees up supply space, demand surge arising from upcoming travel season in America and Europe as well demand boom expected from the Middle East in the emerging hot season are expected to drive a proportionate surge in global refinery runs by 4.0 million bpd ahead of peak July intake.
“This expected seasonal increase and the strength in momentum for an EU embargo are likely to result in higher gas prices through the summer,” Rystad noted.
The Oracle Today reports that boycotting Russian oil in the EU economic bloc would entail significant production shut in and drastic revenue losses to the oil producer. It would also open new economic opportunities for buyers of the country’s discounted oil and also call up new sources of supply to Europe.
Besides, the economic threats arising from the prevailing trade war is perceived as key stimulus for stronger drive for European energy independence from the oil market; a key spur for major investment shift from fossil to greener renewable energy.