Analysis: Russia needs to sell oil. It’s running out of options

Analysis: Russia needs to sell oil. It’s running out of options


The European Union, once hesitant, is now taking steps to halt the flow of Russian oil and refined products to most member states this year as the war in Ukraine drags on. If the bloc agrees to an embargo, it would strike at the heart of Russia’s economy, which has continued to reap profits from its large energy sector.
The United States, Canada, United Kingdom and Australia have already banned imports, and Japan said it would follow suit “in principle” after a G7 meeting over the weekend. Together with an EU embargo, that would put about half the global economy off limits to Russian oil.

Moscow wouldn’t be crippled overnight. Countries like India continue to snap up hundreds of thousands of barrels of crude per day, taking advantage of hefty discounts. And the Kremlin’s tax receipts have been swelled by the overall increase in global benchmark prices triggered by its invasion of Ukraine.

But over time, losing Europe — the destination for more than half of Russia’s oil exports — would deal a blow to the Kremlin, reducing government revenue as other harsh sanctions take a growing toll. It will struggle to find enough new customers to fill the gap. The International Energy Agency and other analysts predict Russian oil production will fall sharply as a result.

“It hurts Russia, without a doubt,” said Henning Gloystein, director of the energy program at Eurasia Group, a consultancy.

Europe’s importance

Moscow relies heavily on revenues from its powerful oil and gas sector, which in January accounted for 45{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} of the federal government’s budget.

And Europe has long been a top customer. Last year, it received about a third of its oil imports from Russia, according to the IEA. Before the invasion of Ukraine, Europe was importing about 3.4 million barrels of oil per day from Russia.

That number has fallen back slightly. Since late February, oil traders in Europe have largely shunned the Russian crude that’s shipped by sea, faced with rocketing shipping costs and difficulty securing necessary financing and insurance. Europe imported roughly 3 million barrels of oil per day from Russia in April, according to Rystad Energy.

But after more than two months of war, the European Union wants to go even further. Its leaders have proposed a ban on all crude imports from Russia within six months, and an end to imports of refined products by the end of the year.

Negotiations are ongoing. While countries like Germany have been racing to curtail their reliance on Russian energy, others have said they wouldn’t be ready. Hungary’s government said it would need three to five years to wean itself off Russian oil. Other landlocked states such as Slovakia and the Czech Republic, which lean heavily on supplies delivered by pipelines, want similar carve-outs.

Still, the EU plan would pile pressure on Russia’s economy, which the International Monetary Fund had already predicted would shrink by 8.5{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} this year, entering a deep recession.

Analysts at Rystad Energy and Kpler, another research firm, expect that Russia will need to curtail production by about 2 million barrels a day — or roughly 20{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} — as a result of the embargo.

“Oil is a major source of hard currency for Russia, and since the introduction of financial sanctions has become a vital lifeline for the Russian economy and a crucial funding source for the war,” wrote experts at Bruegel, a Brussels-based think tank.

India steps in, China lags

The embargo from a huge importer like Europe will have downsides. If crude prices rise as a result, Moscow could actually bring in more government revenue from oil taxes, at least in the short-term.

That hinges, however, on Russia’s ability to redirect oil to other buyers. That won’t be easy.

A significant portion of Russia’s oil exports to Europe travel to the bloc via pipelines. Rerouting those barrels to markets in Asia would require costly new infrastructure that would take years to build.

Oil that travels by sea, meanwhile, could find alternative buyers. India — which consumes about 5 million barrels of oil per day — has sharply increased its imports from Russia since the war broke out.

Russia’s main Urals crude is priced in relation to benchmark Brent. Before the invasion, it was trading at a discount of a few cents. Now the discount is $35 a barrel, making it much more attractive to buyers who aren’t constrained by sanctions.

Data from Rystad Energy shows that India’s crude imports from Russia jumped to almost 360,000 barrels per day in April, a fivefold increase over January.

“At a time when others are willing to shirk or shun Russian crude, they are seemingly the biggest beneficiaries of lower prices here,” said Matt Smith, lead oil analyst at Kpler.

India, for its part, has played down the import spike. In a statement last week, the Ministry of Petroleum and Natural Gas said the country imports oil from all over the world, including a significant volume from the United States.

“Despite attempts to portray it otherwise, energy purchases from Russia remain minuscule in comparison to India’s total consumption,” the ministry said in a statement.

China, historically the single biggest buyer of Russian oil, had been expected to go on a shopping spree, too.

Data from Rystad, Kpler and OilX shows that imports have risen since the invasion of Ukraine, but not as dramatically.

OilX, which uses industry and satellite data to track oil production and flows, found that China’s imports from Russia by pipeline and sea rose by just 175,000 barrels per day in April — an increase of about 11{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} over average volumes in 2021. Seaborne imports are rising more sharply in May, according to early data.

Still, China’s demand for energy has dropped as it ramps up efforts to stop the spread of the coronavirus by imposing tough restrictions on major cities.

For now, that leaves Moscow — a close ally of Beijing’s — in the lurch.

“The Chinese haven’t piled in and gobbled it all up,” Gloystein of Eurasia Group said.

Quoted from Various Sources

Published for: Ipodifier