We shouldn’t be worried about the West’s latest sanctions on Russian oil

How big can the damage be? Perhaps much less than many fear.

EU countries will halt most marine imports of Russian crude on 5 December 2022, with pipeline flows to Poland and Germany shutting down by the end of this year. Shipments to Europe have already been reduced by half before Russian President Vladimir Putin sent his troops to Ukraine in February, with much of the rest to China, India and Turkey.

Depending on how successful Moscow is in finding new buyers – a tanker of its crude oil has been discharged at the Ruwais refinery in Abu Dhabi, potentially opening a new outlet – EU sanctions are one Will cut flow by as much as 700,000 barrels a day. Pipeline deliveries to Poland and Germany were running at a rate of about 650,000 barrels per day last year. So that would bring the total volume directly at risk to a maximum of 1.35 million barrels per day.

An even bigger concern is that war-related Western sanctions on providing shipping, insurance and other services for the Russian oil trade could cut off flows to non-European countries, where vast quantities are at stake. But it is becoming more likely that they will trade on non-European vessels insured in Russia or the buying country.

The price cap on Russian oil, an idea supported by the US, is to provide a kind of safety valve, allowing buyers to continue using European ships and insurance if the price they pay for the cargo is not yet is less. -Determined level.

I doubt it will have any real effect, though. Countries that have signed up for this US-led price cap have also banned purchases of Russian crude. Buyers who haven’t come on board will be reluctant to do so. Russia has repeatedly said it will not sell oil to countries that limit its prices, and there is no penalty for shunning US initiatives.

Russia’s remaining buyers [like India, which has ramped up imports of Russian oil] Modest negotiations may benefit, but it is provided by a shrinking pool of refiners wanting to process Moscow’s crude, rather than border it. China, India and Turkey, now the biggest buyers of Russian crude, will not risk trade to please Washington.

So I don’t think sanctions will affect the flow of Russian crude to non-European countries. The world may find it too easy to cope with the loss of at least 1.35 million barrels a day of Russian crude oil when sanctions were first proposed. It might actually welcome it.

On the supply side, the output cuts by the OPEC+ group of oil producers, of which Russia is a key member, would be nothing close to the headline figure of 2 million barrels per day announced last month. Most analysts estimate the actual cut at about half that level. I think after you factor in production recovery in Kazakhstan and Nigeria it could be even smaller, which would offset the actual production cuts that would probably only be done by Saudi Arabia, Kuwait and the United Arab Emirates.

On the other side of the balance, oil consumption is falling, fueled by higher prices, a stronger US dollar and central banks’ determination to combat massive inflation even at the expense of economic growth.

It’s not just my point of view. “We will continue to see demand decline for another few months,” says Russell Hardy, chief executive officer of the Vitol Group, the world’s largest independent oil trader. Ed Morse, global head of commodity research at Citigroup, sees oil demand “slowing to a worldwide bottom.”

The reopening of the Chinese economy could change that picture, according to Bloomberg Intelligence, but Friday’s hopes of easing Chinese COVID restrictions may be premature.

The International Energy Agency (IEA), which now sees global oil demand in the current quarter down 300,000 barrels a day from the same period last year, has cut its forecast for consumption next year by 550,00 barrels per day.

To balance supply and demand, the world will need 29 million barrels of crude per day from members of the Organization of the Petroleum Exporting Countries (OPEC) in the coming months, even as the 1 million barrels of Russian supplies from December With daily losses. With a slight improvement in Nigerian production, which is already underway, the group’s chances of pumping up if the group members do not exceed their new targets are almost fine.

If Russian supplies do not decline, the crude oil market looks over-supplied in the coming months.

Julian Lee is an oil strategist for Bloomberg First Word.