Global buyers start to shun Russian oil after U.S. ban
The U.S. ban on Russian oil imports may not mean all that much at first glance. But a combination of sanctions and ‘self-sanctions’ by companies globally is already disrupting the flow of Russian oil.
The United States announced a ban on the import of Russian oil, natural gas, and coal on March 8, a move aimed at raising the cost on the Kremlin for Russia’s war in Ukraine. The move was largely symbolic, but it may nevertheless have a significant impact on global energy markets, especially as buyers around the world have already begun to shun Russian energy.
“This is a step that we’re taking to inflict further pain on Putin,” Biden said. “The decision today is not without cost here at home. Putin’s war is already hurting American families at the gas pump.”
The U.S. ban on Russian oil alone won’t have a huge impact on energy flows. The U.S. imported roughly 700,000 barrels per day of oil and refined products from Russia last year, a modest sum compared to the 20 million barrels per day consumed in the United States.
“Not an inconsiderable amount, but an amount that can probably be replaced from other sources,” Gregory Brew, a historian and visiting fellow at Yale University, told Gas Outlook. “From the U.S. perspective, the ban on imports is fairly symbolic. I think the political pressure for a ban developed much more quickly than anyone anticipated, certainly much more quickly than the administration anticipated.”
In the immediate aftermath, oil markets gyrated on the uncertainty, with benchmark prices briefly shooting up above $130 per barrel.
“The biggest impact of the ban was to inject more anxiety into the markets, so that the price of oil, especially, went higher for a few days,” Scott L. Montgomery, an author and lecturer at the Jackson School of International Studies, University of Washington, told Gas Outlook.
Following the spike, prices have since dipped back below $100 per barrel after the initial fears of a more comprehensive cut-off of Russian energy did not materialize. At the same time, new Covid-19-related lockdowns in China are a drag on oil demand, and that the U.S. Federal Reserve raised interest rates for the first time in nearly four years throws up another headwind to the global economy.
Russia’s oil exports take a hit
The U.S. ban on Russian oil was likely the opening salvo in what might be a long campaign to cut into Russian energy revenues. The United Kingdom followed in the Biden administration’s footsteps, announcing a phaseout of Russian oil imports by the end of the year. But the European Union made clear that, at least for the moment, it does not want to go down this road due to the bloc’s higher dependence on Russian oil and gas. Europe is a major buyer of Russian energy, accounting for half of Russia’s crude oil exports, and nearly 75 percent of its gas exports.
But even though the U.S. is a small buyer of Russian oil, the ban, combined with the broader sanctions regime that has left Russia as an international pariah, is having much more significant impacts on the oil market.
Crucially, private companies are “self-sanctioning” – declining purchases of Russian oil either over legal fears or because of the stained reputation of being associated with the war.
The International Energy Agency (IEA) said on March 16 that it expects Russia to lose 3 million barrels per day of exports in April. “The implications of a potential loss of Russian oil exports to global markets cannot be understated,” the IEA said in its latest oil market report. “Unprecedented sanctions imposed on Russia to date exclude energy trade for the most part, but major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country.”
“If that is the case, that would clock in at between 2 and 3 percent of global demand, making it one of the largest supply interruptions in history, on par with the interruption in 1979,” Brew said. “That would be a pretty historic blow to the market.”
The IEA added that the losses could rise if “restrictions or public condemnation escalate.”
Russia is now being forced to offer deep discounts on its oil to entice buyers. Shell bought a cargo of Russian oil for a $28.50-per-barrel discount below the prevailing market price. It faced a backlash from doing so, which may be seen as a warning to other companies.
“This was already causing disruptions before the US and UK bans, but with sanctions targeting directly oil trade flows, the self-sanctioning could intensify in the coming weeks with more companies withholding from buying Russian crude,” Andreas Economou, a senior research fellow at the Oxford Institute for Energy Studies, told Gas Outlook.
With the West increasingly hostile territory for Russia, it may look elsewhere. “Russia will be able to find new markets for most or all of its oil in Asia,” Montgomery said, with China and India the most prominent buyers of Russian energy going forward. “The potential challenge for Moscow is that it is in a weak bargaining position. It has already sold about 3 million barrels to India at a discount of 25%. China will drive a similar bargain.”
But there are now questions about the durability of China’s oil demand with strict lockdowns in several cities due to a coronavirus outbreak. China, a sort of “customer of last resort,” may not be able to absorb all the misplaced Russian barrels, Brew said.
Moreover, there are other obstacles for Russia rerouting oil exports to Asia. The ability to move oil and gas is constrained by “the reluctance of many banks to finance Russian-related commodity transactions, limits on hedging activities, the increased cost of moving crude in the face of heightened security concerns, higher fuel costs and higher insurance premiums,” Economou said.
On the other hand, despite sanctions and the market turmoil, a new report from Energy Intelligence indicates that Russian oil continues to flow without too much interruption. That suggests Russia is still finding buyers, despite sanctions and “self-sanctions” the West.
But Russia’s war is only a few weeks old, and the retaliation from Europe and the U.S. could become increasingly severe. If the EU followed in the same footsteps and blocked imports of Russian oil, gas, and refined products, the impacts would be profound. “In such a scenario we expect to see the disruption of some 80% of Russia’s exports shutting-in nearly 4 mb/d of Russia’s crude production in the coming months,” Economou said.
“We are certainly not out of the woods in terms of a sudden shutdown in Russian supply,” Brew said. If the war continues to escalate, the EU could go as far as cutting off Russian oil and gas imports. Or, Moscow could decide to make that move on its own to punish Europe. At this point, it’s hard to know.
“It all depends on what happens on the ground in Ukraine,” Brew said.