The world may need that Russian oil output cut after all
The world’s about to lose a lot of Russian crude when European Union sanctions and a US-led price cap come into effect in 29 days. That may not be a bad thing. How big might the loss be? Perhaps much less than many fear.
EU countries will halt most seaborne imports of Russian crude on 5 December, with pipeline flows to Poland and Germany to stop by the end of the year.
Shipments to Europe are already down to half what they were before President Vladimir Putin sent his troops into Ukraine in February, with most of the rest diverted to China, India and Turkey.
Depending on how successful Moscow is at finding new buyers — a tanker of its crude has just discharged at the Ruwais refinery in Abu Dhabi, potentially opening up a new outlet — the EU sanctions will cut flows by 700,000 barrels a day, at most.
The pipeline deliveries to Poland and Germany were running at about 650,000 barrels a day last year. So that would bring the total volume directly at risk to a maximum of about 1.35 million barrels a day.
The bigger worry is that bans on providing shipping, insurance and other services to the Russian oil trade could cut flows to non-European countries, where much larger volumes are at stake.
But it is becoming more likely that they will simply drive the trade onto non-European vessels insured in Russia or the buying country.
The price cap — championed by the US — is meant to provide a safety valve, allowing purchasers to continue to access European vessels and insurance if the price they pay for the cargo is below a yet-to-be-determined level.
I doubt it will have any real impact. The countries that have signed up to the cap have also banned purchases of Russian crude. Buyers that have not come on board will be reluctant to do so. Russia has said repeatedly that it will not sell oil to countries that cap its prices and there are no penalties for shunning the US initiative.
Russia's remaining buyers may get marginal negotiating leverage, but that is conferred by the shrinking pool of refiners willing to process Moscow's crude, rather than by the cap. China, India and Turkey, now the biggest buyers of Russian crude, will not risk the trade to please Washington.
So I do not think flows of Russian crude to non-European countries will be hurt by the sanctions.
The world may find it a lot easier to cope with the loss of, at most, 1.35 million barrels a day of Russian crude than was feared when the sanctions were first proposed. It may actually welcome it.
On the supply side, an output cut by the OPEC+ group of oil producers, of which Russia is a key member, will not be anything close to the headline figure of 2 million barrels a day they announced last month. Most analysts assess the actual cut at about half that level.
I think it could be even smaller after you factor in recovering output in Kazakhstan and Nigeria, which will offset real production cuts that will probably only be made by Saudi Arabia, Kuwait and the United Arab Emirates.
On the other side of the balance, oil consumption is falling, hit by high prices, a strong US dollar and central banks' determination to combat rampant inflation, even at the expense of economic growth.
This is not just my view. Russell Hardy, chief executive officer of the world's biggest independent oil trader, Vitol Group, says "We are going to continue to see demand destruction for another few months." Ed Morse, global head of commodities research at Citigroup Inc, sees oil demand "sloshing downward around the world."
A reopening of the Chinese economy could change that picture, but Friday's hopes for an easing of Chinese Covid restrictions may be premature, according to Bloomberg Intelligence.
The International Energy Agency, which now sees global oil demand in the current quarter 300,000 barrels a day below the same period last year, has cut its forecast for consumption next year by 5,50,00 barrels a day
To balance supply and demand, the world will need 29 million barrels a day of crude from the members of the Organisation of Petroleum Exporting Countries in coming months, even with the loss of 1 million barrels a day of Russian supply from December.
With a modest recovery in Nigerian production, which is already underway, that is almost exactly what the group's likely to pump if its members do not exceed their new targets.
If Russian supply does not fall, the crude market looks oversupplied in the coming months.
Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
