THE 'PAIN' FOR PUTIN FROM AN EU EMBARGO ON RUSSIAN OIL BEGAN

 Filenews 12 December 2022 

By Julian Lee

The almost total ban on imports of Russian crude into the European Union is finally hitting Russia's oil revenues. Concerns that he would provide the Kremlin with an unexpected river of profits in order to finance its war in Ukraine are belied - at least for now.

Fears

The U.S. government feared that EU sanctions on Russia's seaborne crude, which came into effect last Monday, would skyrocket prices. Of particular concern was the ban on the provision of ships and services such as insurance and financing to Russian cargoes transported anywhere in the world.

To mitigate the impact, the US proposed a price cap on Russian exports. Cargoes purchased at a price below the ceiling, which was eventually set at $60 per barrel, are ultimately exempt from the transport and service ban.

But it seems that in the end they don't have to worry - at least not yet.

Losses

The last Russian barrels before the embargo was activated have already been sent to ports in Europe. Moscow has lost a market on its doorstep for more than 1.5 million barrels per day. It looks like it will lose sales of another 500,000 barrels a day by the end of the year if Poland and Germany meet their pledges to stop imports of Russian oil through pipelines.

However, oil prices have not skyrocketed. By Friday, the fifth day after the import ban, Brent crude oil – a global benchmark – was trading below $77 a barrel and, for a while, fell below $76. This level is more than 14% lower than the highs recorded on Monday, just after the sanctions came into force.

Fears that triggering the EU embargo on Russian oil would drive up prices were not confirmed

The prices that Russia achieves for its crude shipments have fallen even further. Its main type of crude export (Urals) was changing hands for just over $40 a barrel at Russian ports in the Baltic, which remain the largest export route for its crude. This is roughly the level identified as the cost of production and well below the ceiling of USD 60 per barrel imported alongside the ban on imports from the EU.

The importance of Russian ports in the Baltic even after the loss of the European market for Russia shows the country's inability to redirect its oil flows. The only pipeline to China and the export terminal on the Russian Pacific coast, in Cozmino, is already full, and the only way to get Russian oil from the last remaining markets in Russia, namely China, India and Turkey, is through long journeys around Europe and via the Suez Canal.

The average shipments of Russian crude over the past four weeks - its main buyers are now China, India and Turkey

 "Overload"

Instead of creating a shortage of crude in the market, EU sanctions have created local overloads in these markets.

A huge volume of Russian oil competes with flows from traditional suppliers in the Middle East, while sellers have to offer large discounts to compensate for the high cost of longer trips required to deliver cargo from the Baltic.

Meanwhile, Europe is not under pressure to meet its crude needs. Russia's invasion of Ukraine, which has fuelled inflation, including that of food and energy prices, has undermined European economies to the point that, as I estimated at the beginning of November, the world can easily manage the loss of Russian barrels, at least for now.

Risks

This may change in the coming months. China is easing its Covid restrictions, which could eventually spark demand for fuel, which had been constrained by travel restrictions and a slowdown in economic activity. This fact will "tighten" the market again.

There is also a potentially more 'dramatic' ban on the part of the EU which will soon come into effect on imports of Russian refined petroleum products, such as diesel. This could upset oil markets which are already short of this fuel used in transport.

Meanwhile, Russian President Vladimir Putin is threatening to cut oil production in response to the price cap for his crude. He can see that the oil industry makes the decision for him if he cannot sell its oil profitably.

The Kremlin already faces an imminent big blow to its revenue from the crude export tariff next month. Based on crude prices in the middle of last month, Russia's tariff per barrel could well fall in January to the lowest level since the Covid-19 pandemic reduced revenues in early 2020.

Russia's crude export tariff revenue heading towards a three-year low in January

At the moment, the world has been able to deal effectively with the diversion of Russian crude from Europe to Asia, and the cost, as western capitals hope, falls on the backs of the Kremlin.

Source: BloombergOpinion