The European Union has reduced its seaborne imports of crude oil from Russia, but just ahead of the embargo effective December 5, the EU was still importing Russian crude and even raised its imports of Russian diesel by sea, ahead of the product import ban in February.
Oil flows and global oil trade routes have changed materially in the past months as Russia pivots to Asia while Europe seeks to import more crude and products from producers other than Russia.
Although the EU embargo and the EU-G7 price cap on Russian crude oil at $60 per barrel didn’t immediately roil the oil market – with traders concerned about a possible demand hit from slowing economies – uncertainty is growing over how the bans on Russian imports will affect supply balances over the next few months.
One thing is certain: the EU needs around 1 million barrels per day (bpd) of Russian products – diesel and naphtha – replaced by February.
EU Imports of Russian Crude Sink Ahead Of Embargo
Russian exports of crude oil to Europe dipped by 430,000 bpd to 1.1 million bpd in November, the International Energy Agency (IEA) said in its Oil Market Report this week.
Seaborne crude exports to the EU declined by a massive 330,000 bpd to just 500,000 bpd. The bloc’s crude oil imports from Russia by sea plunged to below the imports via the Druzhba pipeline – which are not subject to embargoes – for the first time, according to the IEA’s report cited by Reuters. The EU imported 590,000 bpd of oil via the Druzhba pipeline from Russia last month.
The change in Russia’s oil flows was evident last month, as total oil exports rose to the highest level since April, thanks to a jump in diesel shipments. While Russian crude exports to Europe dipped by 430,000 bpd from October, shipments to India hit a record 1.3 million bpd, according to IEA data. Related: Petrobras Sheds $41 Billion In Market Value In 2 Months
Russia is also estimated to have overtaken Iraq to become the single-largest oil supplier to India in November, as Indian refiners raced to stock up on Russian oil ahead of the December 5 price cap and associated bans on transportation services for Russia’s crude.
Before the Russian invasion of Ukraine, India was a small marginal buyer of Russian crude oil. After Western buyers started shunning crude from Russia, India became a top destination for Russian oil exports alongside China.
Russian crude oil exports are expected to drop from January when the EU embargo will have come into full effect.
“A steeper drop is expected next month as the EU ban on Russian crude imports and the G7 price cap take effect,” the IEA said in its monthly report.
The EU will have to replace the Russian crude imports by sea with more purchases from Kazakhstan, the U.S., Norway, Brazil, or Guyana, the IEA and analysts say.
EU Diesel Imports Surge, Including From Russia
Apart from Russian crude oil, the EU will have to soon replace around 1 million bpd of imports of Russian oil products, including diesel which has been in short supply in Europe for months.
Europe could be on track for the second-highest monthly imports of diesel in at least six years as it prepares for the embargo on Russian diesel imports by sea as of February by buying diesel from all around the world, including large volumes from Russia while it’s still allowed.
Europe buys large volumes of diesel from the Middle East and Asia, but Russia is still its single largest diesel supplier, two months before the EU embargo on seaborne imports of refined Russian products comes into force on February 5.
As the EU embargo on imports of Russian diesel enters into force, “The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers,” the IEA said in its monthly report in November.
In the December report out this week, the agency said, “Crude oil loadings were unchanged on the month at just over 5 mb/d, despite a 430 kb/d drop in shipments to Europe. By contrast, product flows (in particular of diesel) surged, including to Europe.”
Another Price Rally?
Another price rally may be in the making in the coming months as the full effect of the bans on Russian exports takes effect early next year, according to the IEA.
“While lower oil prices come as a welcome relief to consumers faced by surging inflation, the full impact of embargoes on Russian crude and product supplies remains to be seen. As we move through the winter months and towards a tighter oil balance in 2Q23, another price rally cannot be ruled out,” the agency said.
Russian supply to the global oil market will depend not only on Moscow’s ability to place as much as crude and products as possible with buyers in Asia unfazed by or deliberately evading the price cap mechanism, but also on the effect of the Kremlin’s political response to the price cap.
Russia has vowed to take measures to counter the price cap and prepares to ban the sale of Russian crude oil to buyers part of the Price Cap Coalition or if the purchase is limited by the price cap.
“A material disruption in the export of Russian crude was expected as a result from the new sanctions but so far the impact has been insignificant if any at all. One reason is the fact that a large portion of Russian seaborne crude oil exports already traded below the price cap,” Bjarne Schieldrop, chief analyst commodities at SEB bank, said in a note on Wednesday.
“It may be too early to really assess the net impact of the sanctions this early after the deadline,” Schieldrop said, but added that some reduction in Russian crude exports is likely.
By Tsvetana Paraskova for Oilprice.com
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