The Organisation of Petroleum Exporting Countries and its partners in OPEC+ led by Russia decided this week they would not increase their target production figure for next month. Effectively, OPEC+ slapped the EU in the face, as this decision means no additional oil is coming to Europe to replace sanctioned Russian barrels. The European Commission earlier this week proposed an oil embargo on Russian crude oil and refined products as part of the sixth sanction package being discussed by the EU. The crude oil embargo, EC President Ursual von der Leyen said, would come into effect after six months and the refined product embargo would come into effect at the end of this year.
The European Union imports some 3.5 million barrels of crude oil and refined products from Russia. That’s about half of Russia’s total oil and product exports and about a quarter of the EU’s oil imports. The six-month period is supposed to help EU members find alternative suppliers. However, these are few and far between, and they have no plans to boost production to help the EU.
According to a Reuters report on Thursday’s OPEC meeting citing two sources, the delegates “completely avoided any discussion about sanctions on Russia, wrapping up talks in near record time of just under 15 minutes”.
The report went on to quote the head of commodities at Investec, Callum Macpherson, as saying that "OPEC+ continues to view this as a problem of the West’s own making and not a fundamental supply issue that it should respond to."
In March, OPEC’s secretary-general, Mohammed Barkindo, warned that there is no spare capacity in the world to compensate for a hypothetical full embargo on Russian oil exports, which amount to some 7 million bpd in crude and refined products.
“This is about how we survive this crisis. There is no capacity in the world in the moment that can replace 7 million barrels of exports,” Barkindo said at CERAWeek in March and this week repeated his remarks ahead of the OPEC+ meeting.
There is, however, enough capacity to replace Russia’s exports to the European Union, within OPEC itself. According to Rystad Energy estimates cited by Reuters, Saudi Arabia, the UAE, Kuwait, and Iraq together have spare production capacity of some 4 million bpd.
"Most of these countries have vast onshore storage capabilities that can be tapped, meaning that a few million barrels could be nominated for exports in weeks, if not days," said Louise Dickson, an analyst with the Norwegian energy consultancy.
This is good news for the European Union, as far as supply goes. As far as prices go, it will be an entirely different matter. Because the EU must be aware that it’s not about securing alternative supplies but about doing it at relatively affordable prices.
Yet in this situation, Saudi Arabia, Iraq, Kuwait, and the UAE have no motivation to make discounts. On the contrary, they have motivation to do what they are doing – sticking to modest increases in production and enjoying the climb of oil prices as market movements defy, for the moment, the saying that the cure for high oil prices is high oil prices.
While they might refuse to discuss it, the EU sanction drive against Russia has proved to be a boon for OPEC producers. It has done wonders for oil—and gas—prices, especially with many OPEC producers technically unable to boost their production, providing additional support to benchmarks and boosting producers’ profits.
The likelihood of things changing over the next six months—assuming the EU votes for the embargo—is doubtful, based on OPEC’s reactions to pleas from the UK and the U.S. for more oil from before the war in the Ukraine. Speaking of the U.S., its ability to fill the oil gap in Europe is also doubtful.
According to the U.S. Energy Information Administration, crude oil output in the country this year will only grow by 800,000 bpd. Perhaps the U.S. could reach into its reserves to send some crude to its European allies but it already announced the release of 180 million barrels from the strategic petroleum reserve in order to reduce local retail fuel prices.
Reports that oil from last year’s release from the SPR have won the federal government zero favors with voters, so it might be more careful this time. In fact, it is being careful—the White House said it planned to buy back 60 million barrels to replenish the SPR over the next few years.
The EU wants to give itself six months to find alternative suppliers of crude oil before halting the intake of Russian barrels. That these are also six months Russia can use to redirect more of its oil east is not something Brussels likes to talk about, but that’s beside the point.
Without OPEC on its side, the EU might have to give its citizens the bad news that petrol, diesel and everything that gets transported with internal combustion engine vehicles is going to remain expensive for longer than one might have hoped.
By Irina Slav for Oilprice.com
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