EU partial ban on Russian oil ramps up supply pressure
After haggling with Hungary for weeks, the deal exempts oil shipped by pipeline.
The European Union announced on May 30 a partial ban on Russian oil after reaching a compromise with Hungary, allowing exemptions for oil moving through pipelines.
The sixth package of sanctions bans Russian oil shipped by sea within six months, and although weakened by the exemption, the decision could still significantly impact Russian oil supplies. The EU said that by year-end, it could eliminate 90 percent of its oil imports from Russia. In addition, refined products imports will be banned within eight months.
A handful of landlocked European countries dependent on Russian oil stalled the European-wide ban for several weeks. The Druzhba pipeline system, which stretches from Russia into multiple countries in Eastern and Central Europe, accounts for about a third of European imports from Russia, with the rest shipped by sea. But after receiving what amounts to an exemption, Hungary signed on.
Germany and Poland pledged to phase out their pipeline imports as well, which would bring the impacted Russian oil flows to Europe up to 90 percent.
“We should be able to soon return to the issue of the remaining 10 percent of pipeline oil,” European Commission President Ursula von der Leyen said at a news conference on May 31.
There is no doubt that the new EU ban will have an impact on Russian oil, but to what extent remains unclear. The big question is how much of Russia’s oil exports to Europe can be shifted east, says Ben Cahill, a senior fellow for energy security and climate change at the Center for Strategic and International Studies, a Washington DC-based think tank.
“There are also doubts about how much more oil India and China are willing and able to take from Russia. India has bought large amounts of heavily discounted oil from Russia in recent months – from 600,000 to 800,000 b/d, whereas before this year it bought hardly any Russian crude. This is not surprising for a price-sensitive buyer, and after all this trade is still legal,” Cahill told Gas Outlook. “I do think there are limits. It seems quite unlikely that Russia will be able to find alternative buyers for all of the roughly 1.6 million b/d it normally exports via tanker to Europe.”
Other analysts also voiced skepticism that Russia could offset the entire impact by moving oil to India and China.
“Russia expressed confidence that it would be able to find alternative routes for its oil that will no longer be purchased by Europe on account of the embargo,” Commerzbank wrote in a note on June 2. “The extent to which this will prove achievable is questionable, however. Russian oil production is therefore likely to fall again in the coming months.”
Impact on prices
The secondary sanctions that cover insurance on shipping Russian oil could be even more important than the direct ban on Russian oil. The ban on insurance, which will be phased in within six months, could complicate Moscow’s ability to shift oil flows from Europe to Asia.
“Probably the most impactful part of the new package of sanctions is the ban on insuring Russian oil cargoes. This insurance ban will make it significantly more difficult for the Russian oil companies to sell their oil even at a discount to willing buyers,” Alexander Kurov, the Fred T. Tattersall Research Chair in Finance and professor at West Virginia University, told Gas Outlook. “Besides, not all oil importers have oil refineries suited to process Russian crudes.”
He added that the stock prices of Russian oil companies Rosneft and Lukoil fell by 9 percent and 7 percent respectively, immediately following the announcement of the EU ban. That suggested that markets expected the impact to be significant.
But while a partial ban on Russian oil could force up global crude prices, much of the price increase is likely already factored in oil futures prices, Kurov added.
The six-month phase-in was another concession that weakens the overall impact, and provides Russia some time to shift oil exports elsewhere. “Although, the measures announced by the European Union look threatening, we don’t see a crippling impact on the Russian oil sector – neither imminent, nor in six months. Russian oil producers have time to solve logistics problems and change their client base,” analysts at Russia-based Sinara Investment Bank said, according to Reuters.
Russia is also disguising the origin of its oil, allowing some crude to find its way into banned markets, the Wall Street Journal reports. Oil is swapped from ship to ship at sea, obscuring its source, a practice that has become common with sanctioned oil from Iran and Venezuela in recent years. After taking an initial hit, Russia’s oil exports rebounded in May not far from pre-war levels.
The new ban could cost Russia roughly $10 billion a year, a fraction of the $270 billion in energy export revenues the Kremlin is expected to take in this year, according to Bloomberg. European officials made clear that they have no immediate plans for additional sanctions, and the troubled negotiations with Hungary exposed divisions within the bloc. Any sanctions on Russian natural gas, for example, are off the table for the time being.
But overall, the partial ban is not trivial, and it ramps up the pressure on global oil supply.
“It’s a tight oil market, and removing supplies – as opposed to simply redirecting crude flows around the world – will inevitably drive up prices. The supply response from the United States and OPEC+ has been muted so far,” Cahill said. “So, if this embargo has teeth, it’s hard to see prices falling back below $100/b in the near term unless there is a recession or real demand destruction.”