The World May Need That Russian Oil Output Cut After All


The world will lose a lot of Russian crude when EU sanctions and US-led price caps take effect in 29 days. This may not be a bad thing.

How big could the loss be? Perhaps a lot less than many fear.

EU countries will halt seaborne imports of most Russian crude on Dec. 5, and pipelines to Poland and Germany will stop by the end of the year. Shipments to Europe have fallen to half what they were before Russian President Vladimir Putin sent troops into Ukraine in February, with much of the rest being diverted to China, India and Turkey.

Depending on how successful Moscow is in finding new buyers — its crude oil tankers have just unloaded at the Ruwais refinery in Abu Dhabi and could open up a new export — EU sanctions will reduce flows by up to 700,000 bpd. Pipelines to Poland and Germany delivered around 650,000 barrels per day last year. Therefore, this would bring the total production directly at risk to a maximum of about 1.35 million barrels per day.

The bigger concern is that a ban on shipping, insurance and other services to Russia’s oil trade could reduce flows to non-European countries, where oil supplies are much larger. But they are more likely to simply push trade to non-European ships insured in Russia or the country of purchase.

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The price caps, advocated by the US, are designed to provide a safety valve whereby buyers can continue to get European ships and insurance if they pay less for their goods than they have yet to determine.

I doubt it will have any real impact. The countries that signed the cap are also banned from buying Russian crude. Buyers who haven’t joined will be reluctant to do so. Russia has repeatedly said it will not sell oil to countries that cap its prices and will not be penalized for shunning the U.S. initiative.

Russia’s remaining buyers may get a paltry bargaining chip, but that’s due to a shrinking number of refiners willing to process Moscow crude, not a cap. China, India and Turkey, now the biggest buyers of Russian crude, will not risk trade to please Washington.

Therefore, I don’t think the flow of Russian crude oil to non-European countries will be affected by the sanctions.

The world may find it easier to deal with a loss of up to 1.35 million barrels a day of Russian crude than it feared when sanctions were first proposed. It might actually welcome it.

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On the supply side, the OPEC+ group of oil producers, of which Russia is a major member, will not cut production anywhere near the headline figure of 2 million barrels per day they announced last month. Most analysts estimate the actual decline to be about half that level. I think it’s likely to be smaller given the recovery in production from Kazakhstan and Nigeria, which will offset the actual cuts that may only happen in Saudi Arabia, Kuwait and the United Arab Emirates.

Oil consumption, on the other hand, is falling, hit by high oil prices, a strong dollar and the determination of central banks to fight rampant inflation, even at the expense of economic growth.

This is not just my opinion. “We will continue to see demand destruction over the next few months,” said Russell Hardy, chief executive of Vitol Group, the world’s largest independent oil trader. Citigroup Commodities Research Global head Ed Morse believes that oil demand has “fallen sharply around the world”.

The reopening of China’s economy could change that, but hopes of easing China’s coronavirus restrictions on Friday may be premature, according to Bloomberg.

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The International Energy Agency now expects global oil demand to fall by 300,000 barrels per day this quarter compared with the same period last year, and cut its forecast for next year’s consumption by 550,000 barrels per day.

To balance supply and demand, the world will need 29 million barrels per day (bpd) of crude from OPEC members in the coming months, even if Russia cuts supplies by 1 million bpd starting in December. With Nigerian production recovering modestly, that’s pretty much exactly what the group is likely to increase if its members don’t exceed their new targets.

If Russian supplies do not drop, the crude oil market appears to be oversupplied in the coming months.

More from Bloomberg Views:

• Russia’s biggest concern is finding oil buyers: Julian Lee’s Elements

• How US and Saudi are overcoming latest OPEC+ spat: Hussein Ibis

• Vladimir Putin’s Guide to Alienating Allies: Clara F. Marques

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist at Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Research.

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