🛢Sanctions hit Russian oil

How much can the price of oil rise?

Brent crude oil prices have crossed the $110 per barrel level and are trading at their highest since 2014. However, prices are not far from the $115-117 per barrel zone, where highs from 2012 and 2014 are located. Prices have risen 40% since the beginning of the year and 70% since their December low. 

Russia attacked Ukraine and strong sanctions from the West may lead to a complete cessation of oil flow to countries that condemn this war and try to support Ukraine.

How important is Russia to the global oil market?

Russia is one of the largest oil producers in the world. The country produces approx. 10 million barrels per day, of which direct crude oil exports amount to 5 million barrels per day. In turn, petroleum products are around 3 million barrels a day. The European Union countries import approx. 2.5 mbd of crude oil and approx. 1.3 mbd of petroleum products. The rest of the oil is taken by China, India, other Asian nations and some South American countries. Maybe that doesn't seem like much in the context of the entire global oil market, which was valued at 100 million barrels per day before the pandemic. However, logistic connections and the balancing of the oil market mean that even a reduction in the supply of 5 million barrels per day may have a huge impact on oil prices.

Why might Russian exports disappear?

In this case, we have two sides of the coin. Russia is involved in the conflict with Ukraine, but it is criticized by almost the whole world, which imposes various types of sanctions on Russia. Russia could theoretically turn off the oil or gas tap to Europe, but this is unlikely. Europe is the largest recipient of Russian oil, with all exports of "black gold" last year amounting to more than $ 100 billion.

However, the West may decide to opt for an export ban. Canada announced the suspension of imports of oil and its products from Russia. Britain prohibits the docking of Russian ships and tankers in its ports. Europe is dependent on Russian oil, but as many EU experts point out, this is funding the Putin regime with up to EUR 350 million a day. Ukraine is calling for an embargo on Russian oil and gas, although it is known that it will be very difficult to implement. Quoting the figures, 80% of Finland's oil imports come from Russia. For Poland it is almost 60%, for Slovakia over 70%. Germany and the Netherlands account for 30% and 23% respectively. However, in nominal terms, these countries are the largest importers of Russian oil in Europe.

Could Russian oil actually disappear, thus destabilizing the market?

At the moment, oil exports to EU countries via the territory of Belarus are most at risk. Every day about 750,000 barrels are sent through the Druzhba oil pipeline. In turn, 250,000 barrels a day go through Ukraine to the Czech Republic, Slovakia and Hungary. It will be difficult for Russia to transport this oil by sea, but in 2019 imports were stopped for several months due to technical problems. Russia has over 100 large tankers with a fleet of over 2,000 tankers worldwide. Maersk is already refusing to transport Russian oil, and the market rates for Russian oil in the Baltic Sea are increasing several times, from about USD 30,000 a day to even 200,000. USD per day. International operators, however, are reluctant to buy Russian oil, even at the USD 20 per barrel discount compared to Brent crude oil, due to possible sanctions.

China imports about 1.5 million barrels a day from Russia, half of which through the ESPO pipeline, which operates at maximum flow capacity. Nevertheless, it's worth remembering that China has historically benefited from oil sell-offs from sanctioned countries such as Iran and Venezuela. Even at this point, China imports over 700,000 barrels a day from Iran, despite the ongoing US sanctions.

In theory, Russia can ship more to China, India, Thailand, or even Cuba or Venezuela. However, this will not fully replace all of Europe's imports. It is worth mentioning that Russian oil flowed to Europe even at the height of the Cold War. Export to Germany was stopped only when the fighting with the Soviets began during World War II.

What options does the West have?

There are several options that can restore stabilization in the oil market:

• IEA countries have decided to release 60 million barrels from strategic reserves. Assuming that it will be carried out in the next two months, this gives us an additional 2 million barrels per day

• The United States can increase production from shale and allocate this oil to the European market

• China and India may give up strategic purchases at high prices and redirect contracted oil to Europe

• The United States can sign an agreement with Iran quickly. Iran has a large tanker fleet and the ability to quickly restore exports to the level of 0.5-1.5 million barrels per day

• The United States could ship even more of its oil if the Keystone XL oil pipeline with Canada becomes operational

• OPEC + could decide to restore production at a faster pace. OPEC itself has theoretically free production capacity of over 5 million barrels per day

Could the price of oil jump to $ 150 or even $ 200 a barrel?

Such theses are already put forward by Saxo Bank and Bank of America. Bloomberg points to a growing interest in options at these levels, although they are still relatively cheap at the moment. Russia is an important player on the market, but the world can manage without it, and the recent events in Ukraine have shown that this is a right path to follow. The current situation is different from what we witnessed in 2008. Supply can be increased, but at the same time temporary problems with logistics may lead to an increase in prices from the current levels. It is possible that the price will rise above $ 120 a barrel, and the $ 150 level does not seem abstract either. On the other hand, these levels may already cause a total destruction of demand, as it was in 2008, and start another strong crisis in global markets.

Neither side, even the largest oil exporters, wants a strong increase in prices. It is hard to expect that the conflict will de-escalate in the near future, but the high prices are largely influenced by concerns about the suspension of supply from Russia. Payment for Russian oil is still possible, although many market participants prefer to source oil from other sources. However, if the worst-case scenario does not occur, this year could still bring an oversupply in the oil market which could lead to price stabilization.