The World May Need That Russian Oil Output Cut After All

Note

Russian oil is set to lose a lot when European Union sanctions and a US-led price cap take effect in 29 days. That’s not a bad thing.

How much loss can there be? Much less than fear.

Most imports of Russian crude from EU countries will stop on December 5, and pipeline flows to Poland and Germany will be halted by the end of the year. Before President Vladimir Putin sent his troops into Ukraine in February, exports to Europe had halved, with most of the rest coming from China. It was diverted to India and Turkey.

Depending on Moscow’s success in finding new buyers, one of its tankers may open a new facility at the Ruwais refinery in Abu Dhabi. EU sanctions will cut the flow by 700,000 barrels per day. Pipeline exports to Poland and Germany were running at about 650,000 barrels per day last year. That would bring the total volume directly at risk to a maximum of 1.35 million barrels per day.

A bigger concern is shipping for the Russian oil trade; Blocking the provision of insurance and other services could cut off flows to non-European countries; But there is an increasing possibility of non-European ships insured in Russia or simply pushing the trade to the purchasing country.

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Championed by the US — the price cap is intended to provide a safety valve that allows buyers to continue to have access to European fleets and insurance if the price they pay for the product falls below an unspecified level.

I doubt it will have any real impact. Packet countries have also banned purchases of Russian crude oil. Buyers who have not yet come on board will be reluctant to do so. Russia has repeatedly said it will not sell oil to countries whose prices are falling, and that there are no penalties for evading the U.S. initiative.

Russia’s remaining buyers have moderate leverage, but that is vested in a shrinking pool of refiners willing to extract Moscow’s crude rather than cap it. China India and Turkey are now the largest buyers of Russian oil and will not risk trade to please Washington.

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

The loss of 1.35 million barrels per day of Russian crude may be easier for the world to deal with than feared when sanctions were first proposed. That would be really welcome.

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On the supply side, output cuts by the OPEC+ group of oil producers, of which Russia is a key member, did not come close to the headline figure of 2 million barrels per day they announced last month. Most appraisers rate the actual cut at about half that level. Saudi Arabia I think it could be even smaller after accounting for the recovery of production in Kazakhstan and Nigeria, which would offset the real production cuts, possibly only in Kuwait and the United Arab Emirates.

On the other hand, high prices; Even with a strong US dollar and economic growth, central banks’ determination to fight inflation and oil consumption are falling.

This is not just my opinion. Russell Hardy, chief executive of Vitol Group, the world’s largest independent oil trader, said: “We will continue to see demand destruction for a few more months.” Citigroup Inc. Ed Morse, head of global commodities research at the U.S., sees oil demand “declining globally.”

The reopening of the Chinese economy could change that picture, but Friday’s hopes that China will ease Covid restrictions are premature, according to Bloomberg Intelligence.

The International Energy Agency, which cut global oil demand this quarter, cut its forecast for consumption by 550,00 barrels per day next year as global oil demand was lower in the current quarter than in the same period last year.

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To balance supply and demand, the world will need 29 million barrels per day of crude from members of the Organization of the Petroleum Exporting Countries in the coming months, despite Russia’s loss of 1 million barrels per day since December. With a slight recovery in Nigerian production already underway, The group is almost certainly likely to be absorbed if the members do not exceed their new targets.

If Russian supply does not fall, the crude oil market could become oversupplied in the coming months.

More on Bloomberg Opinion

• Russia’s Big Concern Is Finding Oil Buyers: The Elements by Julian Lee

• How the US and Saudis Can Overcome the Latest OPEC+ Spat: Hussein Ibish

• A guide to alienating Vladimir Putin’s allies: Clara F. Marques

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

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

More stories like this are available at bloomberg.com/opinion.

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