Implication of the proposed EU ban of Russian oil for global oil markets

  • This new OIES presentation features our initial empirical assessment of the implications of the proposed EU ban on Russian oil for supply/demand and price dynamics to 2023.
    • Although the degree of uncertainty surrounding the actual size of Russian supply disruptions remains high, March 2022 data show a very small m/m disruption of less than 1% in Russian oil production with our preliminary assessment for April suggesting that disruptions could have risen m/m by 0.5 to 0.9 mb/d with Russian crude output falling between 10 mb/d and 10.5 mb/d from 11 mb/d in March.
    • The disruptions in Russian oil appear to intensify in April mainly due to storage constraints as domestic demand fell and demand for product exports declined. In March, we estimate that Russia’s products demand declined sharply m/m by 11% to 2.8 mb/d, a fall by 0.35 mb/d y/y. At the same time, Russian product exports fell m/m by 25% with Europe and the Americas accounting for the entire decline (-0.8 mb/d m/m). As a result, Russian refiners cut runs by nearly 11% m/m in March with the output of all products being impacted and preliminary estimates suggest that runs dropped further in April to 15%.
    • Russia has been able to redirect some of the decline in oil exports to Europe to other parts of the world with intake from Asia easing the fallout of Russian crude, but product exports have been more difficult to clear. In effect, however, as Russian crude flows are shifting from short- to long-haul it will become increasingly more difficult to clear Russian barrels as time goes by and the impact on Russian crude will be more severe. This is emphatically depicted on Russian crude-on-water that has nearly doubled since the start of the year up by more than 45 per cent reaching to high levels comparable to May 2020 and a rise in floating storage expected to follow suit.
    • The EU-27 proposal on May 4, 2022, to phase out Russia seaborne and pipeline crude imports within 6 months and gradually ban the imports of refined products by year-end has huge implications both for Russian oil but also the global oil markets. In March, EU-27 imports of Russian crude totaled 2.7 mb/d, of which 1.9 mb/d were seaborne and 0.8 mb/d were imported via pipeline, and refined product imports 1.4 mb/d bringing the total (crude and products) EU-27 ban of Russian oil close to 4.1 mb/d. And while it will be challenging to ban all of Russian oil with some landlocked countries that rely heavily on Russian pipeline crude already discussing exceptions (but not opposing the EU ban) and considerable uncertainty remaining about the actual timing of phasing out Russian oil, we assume some 85 per cent of the total EU-27 imports of Russian oil in March (~ 3.5 mb/d) to be halted by year-end.
    • In our Reference case in which the EU-27 ban is excluded, Russia’s crude disruptions mainly due to self-sanctioning reach 1.3 mb/d in May 2022 before gradually rising to 1.9 mb/d ending-2022, around which level they are maintained in 2023. The impacts on oil prices would have been small and the supply gap could be filled considering the supply/demand responses already in effect and the SPR releases. Our Reference case sees the Brent price averaging $105.4/b in 2022 and $99.2/b in 2023, with the supply/demand gap holding near balance in both years.
    • But in our Escalation case in which the disruptions in Russian oil under the EU-27 ban exceed 4 mb/d by August to average at 3.5 mb/d for 2022 as a whole, the impacts are more profound both on price and market dynamics as it is more difficult to fill the supply gap. The SPR releases are expected to ease the near-term pressures, but beyond the near-term some 1.1 mb/d of lost Russian supplies remain uncovered on OPEC+ constraints, the dimmed potential of Iran’s return in 2022 and the capacity constraints outside OPEC+.
    • In response, global oil demand will take a larger hit and y/y growth expected to fall to 1.8 mb/d in 2022 and 0.5 mb/d in 2023, with OECD accounting for 67% (or 1 mb/d) and non-OECD for 33% (or 0.5 mb/d) of the expected losses in total growth by 2023 relative to our Reference case. Fuel demand for industry appears the worst hit accounting for 40% of total demand losses, with massive downgrades seen in diesel and gasoline demand in OECD alone and a combined 1 mb/d of diesel/gasoline demand at risk by 2023.
    • Brent prices in the Escalation case average at $128.2/b in 2022 and $125.4/b in 2023, $22.8/b and $26.3/b higher than our Reference respectively, climbing at $150/b by July 2022 before easing in the $110s in H2 2023. Market deficits are seen re-emerging from H2 2022 onwards and averaging -0.1 mb/d in 2022 and -0.4 mb/d in 2023. With the market failing to build a material surplus after Q2 2022, severe pressure is maintained to the exceptionally tight OECD stocks and in response to market prices.
    • Overall, oil price volatility remains extremely high in both 2022 and 2023 as the outlook is now more than ever sensitive to policy decisions, with Brent ranging between $101.4/b and $130.8/b in 2022 and $85/b and $131.9/b in 2023. This is also reflected in global balance risks, with the supply/demand gap ranging between -0.7 mb/d and 0.8 mb/d in 2022 and -1.8 mb/d and 0.7 mb/d in 2023, favouring more tight markets in both years.

By: Bassam Fattouh , Andreas Economou