Maybe the world needs this cut in Russian oil production after all

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The world stands to lose a lot of Russian crude when European Union sanctions and a price cap imposed by the United States take effect in 29 days. Maybe that’s not a bad thing.

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

EU countries will halt most maritime imports of Russian crude on December 5, with pipeline flows to Poland and Germany expected to stop by the end of the year. Shipments to Europe are already halved from what they were before President Vladimir Putin sent his troops to Ukraine in February, with most of the rest diverted to China, India and Russia. Turkey.

Depending on Moscow’s success in finding new buyers – an oil tanker of its crude just unloaded at Ruwais refinery in Abu Dhabi, potentially opening up a new outlet – EU sanctions will cut flows by 700,000 barrels a day , at most. Pipeline deliveries to Poland and Germany ran at around 650,000 barrels per day last year. This would therefore bring the total volume directly threatened to a maximum of around 1.35 million barrels per day.

The biggest concern is that the ban on providing shipping, insurance and other services to the Russian oil trade could reduce flows to non-European countries, where much larger volumes are at stake. But it is increasingly likely that they will simply direct the trade to non-European vessels insured in Russia or the buyer country.

The price cap – championed by the United States – is meant to provide a safety valve, allowing buyers to continue access to European ships and insurance if the price they pay for cargo falls below a certain level. yet to be determined.

I doubt it will have any real impact. Countries that signed the cap 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 cap its prices and that there are no sanctions to avoid the US initiative.

The remaining buyers from Russia may gain marginal bargaining power, but this is conferred by the reduced number of refiners willing to process crude from Moscow, rather than the cap. China, India and Turkey, now the biggest buyers of Russian crude, will not risk the trade to please Washington.

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

The world may find it much easier to deal with the loss of up to 1.35 million barrels per day of Russian crude than feared when the sanctions were first proposed. He can actually accommodate it.

On the supply side, a production cut by oil producer group OPEC+, of which Russia is a key member, will not come close to the headline figure of 2 million barrels per day they announced last month. last. Most analysts put the actual reduction at around half that level. I think it could be even smaller after taking into account the resumption of production in Kazakhstan and Nigeria, which will offset the real production cuts that will probably only be made by Saudi Arabia, Kuwait and the United Arab Emirates.

On the other side of the scale, oil consumption is falling, penalized by high prices, a strong US dollar and the determination of central banks to fight runaway inflation, even at the expense of economic growth.

It’s not just my point of view. Russell Hardy, chief executive of the world’s largest independent oil trader, Vitol Group, said “we’re going to continue to see demand destruction for a few more months.” Ed Morse, global head of commodities research at Citigroup Inc., sees oil demand “falling around the world.”

A reopening of China’s economy could change that picture, but Friday’s hopes of an easing of China’s Covid restrictions could be premature, according to Bloomberg Intelligence.

The International Energy Agency, which now sees global oil demand in the current quarter 300,000 barrels per day lower than the same period last year, has cut its consumption forecast the next year of 550,000 barrels per day.

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, even with the loss of 1 million barrels per day of Russian supplies from December. With a modest recovery in Nigerian production already underway, that’s about what the band should be pumping out if its members don’t exceed their new targets.

If the Russian supply does not drop, the rough market looks oversupplied in the coming months.

More from Bloomberg Opinion:

• Russia’s main concern is to find oil buyers: elements of Julian Lee

• How the US and the Saudis can overcome the latest OPEC+ conflict: Hussein Ibish

• Vladimir Putin’s Guide to Allied Alienation: Clara F. Marques

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

Julian Lee is 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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