Analysts Look at EU Russian Oil Embargo

Analysts Look at EU Russian Oil Embargo
Fitch Solutions Country Risk & Industry Research and Rystad Energy have their say.

Proposals for a sixth round of sanctions on Russia by the European Union, which include the phase out of Russian crude oil and oil products by the end of 2022, will pass with some amendments and exemption clauses for certain member states.

That’s what Fitch Solutions Country Risk & Industry Research believes, according to a new report by the company sent to Rigzone recently, which highlighted that it has been reported that EU member states Hungary and Slovakia will honor pre-existing supply contracts until their expiry, “meaning that they will import Russian oil until the end of 2023”.

“We think other EU member states may ask for exemptions to the EU’s end-2022 deadline, depending on each economy’s reliance on Russian oil imports,” Fitch Solutions stated in the report.

“Estonia, Latvia and Slovenia are particularly exposed. These countries’ agreement to the EU’s proposed timeline will be determined by the perceived ease with which alternative oil sources can be found quickly,” Fitch Solutions added.

In the report, Fitch Solutions noted that an EU ban on oil imports from Russia will lead to a large-scale reorientation of trade flows, with volumes swinging from West to East.

“Currently, Russia exports more than seven million barrels per day of crude oil, condensates and refined fuels; the bulk of this (approximately 4.5 million barrels per day) flows to Europe,” Fitch Solutions stated.

“Trade flows have already begun to shift but delinking the EU and Russian energy systems in full will be an uphill struggle, given the deep interdependencies that exist between the two,” Fitch Solutions added.

From a broader energy perspective, the EU faces additional risk, should Russia choose to retaliate against the oil import ban, Fitch Solutions said.

“Moscow has previously threatened to cut off natural gas supplies, in response to Western sanctions. Russia currently supplies around 40 percent of the region’s natural gas needs, and infrastructural limitations, as well as existing tightness in the global gas market, mean that these volumes could not be replaced in full, certainly not within a seven month window to the end of 2022,” the company noted.

“Russia has already cut off supplies to Poland and Bulgaria, due to a dispute over RUB-denominated gas payments. Any further substantial reduction in the availability of Russian gas would put extreme strains on the market over the peak demand season in winter. At the very least, this implies significant further energy price inflation and a rationalization of demand in some sectors,” Fitch Solutions added.

Embargo Repercussions Would Be Comprehensive

In a separate statement sent to Rigzone by Rystad Energy, the company’s head of oil market research, Bjørnar Tonhaugen, said the Russian oil embargo currently being mulled over by the EU would tighten global crude markets and unprecedentedly shift trade flows.

“The repercussions of the embargo would be comprehensive and wide-ranging, pushing oil prices higher in the short to medium term,” Tonhaugen said.

“As the sanctions are negotiated, crude prices will stay elevated as war-related uncertainty persists and summer demand kicks in over the coming weeks,” he added.

Tonhaugen noted that the EU is getting very close to enacting its proposed ban on Russian oil imports, including sanctions on shipping and insurance.

“Since unanimity is required within the EU and given the current stance of Hungary in particular, a compromise version of a proposal by the President of the European Commission on 4 May is currently being re-negotiated in Brussels,” he said.

“What seems clear to Rystad Energy, however, is that the EU will act and impose an oil embargo, with certain exemptions made for the land-locked countries of Hungary, Slovakia and Czech Republic, which together imported a total of 290,000 barrels per day of crude oil from Russia in March 2022, of the EU total of close to three million barrels per day,” Tonhaugen added.

“The EU oil embargo will trigger a seismic shift in the European and global crude markets, which Rystad Energy expects could see as much as three million barrels of EU crude imports from Russia cut by December 2022 in a full-fledged implementation of the policy,” Tonhaugen continued.

The Rystad head noted that the reduction in crude imports will likely be back-loaded, as the supply tightness towards the third quarter of the year will likely hamper EU refiners’ ability to source replacement barrels sufficiently as refineries globally ramp-up for the summer demand peak amid very low products stocks.

“Some reductions will occur though, tightening the third quarter market for replacement barrels from regions such as the North Sea, the U.S., West Africa and the Middle East, which the market is already starting to react to in the past couple of days,” he said.

“Thus, we expect to see some more bullish backwardation for summer month contracts once the policy is voted on and put into law. In the meantime, we expect oil prices to remain elevated both due to the negotiations, still present war-time oil price risk premia, and summer demand, even as macro headwinds gain speed,” Tonhaugen added.

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