The EU is set to impose sanctions on Russia’s seaborne crude oil imports on Monday, while experts voice supply concerns as 1.1 million barrels per day (bpd) of Russian oil is expected to go unsold.
To restrain Russia’s economy due to its conflict with Ukraine, the EU decided on June 3 to suspend purchases of Russian crude oil beginning Dec. 5, despite its heavy reliance on Russian hydrocarbon products. The EU will also stop importing petroleum products from Russia on Feb. 5.
Just one month prior to the start of the Russia-Ukraine war that erupted on Feb. 24, the bloc had been importing 2.4 million bpd of crude oil and 1.4 million bpd of oil products from Russia.
The sanctions, which are expected to further deepen the EU’s energy crisis, will be temporarily on hold for some landlocked countries, including Hungary, Slovakia and Czechia. These countries will be allowed to import Russian crude oil via the Druzhba pipeline, although they will not be able to sell the oil they buy to other member countries or third parties.
Bulgaria has been exempted and is permitted to import Russian crude by sea until the end of 2024 because its refinery is designed to process Russian crude oil only.
Croatia was also awarded a partial exemption to continue providing vacuum gas oil—a type of heavy diesel fuel—for the operation of its refinery in the city of Rijeka.
Germany and Poland voluntarily halted imports through the Druzhba oil pipeline despite the granted exemption. The sanctions are estimated to reduce the EU’s oil imports from Russia by around 90%.
Sanctions on Russian oil were further expanded, encompassing restrictions on the transportation of Russian oil to third countries.
In addition to these import bans, the EU and G7 countries are agreed to impose a $60 per barrel price cap on Russian seaborne oil, which will also enter into force on Dec. 5 and will be reviewed every two months.
The parties will ensure that the Russian price cap is set at least 5% below the market price of crude oil.
The EU sanctions also include a ban on providing insurance on other services for vessels carrying Russian oil. The majority of these insurance companies are based in the EU or the UK.
The sanctions aim to limit the markets in which Russia is permitted to trade.
Shipping services and insurance are only permitted for tankers transporting Russian oil purchased at or below the oil price cap established by the Western countries.
According to independent research company Rystad Energy, if the sanctions are fully implemented, only 600,000 bpd of Russian oil is estimated to reach the EU by January 2023.
-Is the price cap a public relations stunt?
Julien Mathonniere, an oil markets economist at Energy Intelligence Group, told Anadolu Agency that he doubts the sanctions and restrictions will harm Russia’s oil sector or economy but would hurt Europe rather than Russia.
‘Some traders told me that the price cap was a public relations effort so removed from reality that the only effect they expect is that Russia will refuse to sell its crude,’ he said.
Noting that Europe has a diesel addiction problem, Mathonniere said the bloc needs to import 25% of its substantial diesel demand, half of which used to come from Russia.
He explained that not all replacement crude available can match the yields of the ideal middle-distillate rich Urals, and reiterated that the EU ban to weaken Russia’s economy is not expected to yield the desired results as ‘there is no genuine effort to remove Russian revenue.’
Nevertheless, he was optimistic that solutions will be devised to ‘find a way around the sanctions and the price cap.’
-Market for substitution crude becomes less efficient in terms of shipping flows
According to Mathonniere, European purchases of Russian Urals volumes have already been replaced.
He explained that it is only European refineries partially owned by Russia, like Lukoil’s ISAB refinery in Italy exempt from sanctions, or refineries outside the EU, that will continue to buy seaborne Urals.
European refiners replaced about 750,000 bpd of seaborne Russian Urals oil in October with a combination of short- and longer-haul crude feedstocks, he said, citing producers in Norway, Iraq and the US.
However, Mathonniere said, not all refineries have been so fast in transforming their feedstock, although the transition has been faster than expected for complex refiners.
He noted that Saudi Arabia and the United Arab Emirates could step up to offer replacement crude, although their volumes are sold under long-term contracts to carefully vetted customers.
In terms of the spot market, he stated that countries such as Norway, the Kurdish Regional Government, Brazil, and Guyana could provide alternative supplies, though shipping flows would be less efficient in transporting substitute crude.
‘Crude must be fetched from farther afield. Urals was the promptest available barrel in Europe, affording refiners a lot of flexibility: they could buy only 10 to 15 days before loading,’ he said.
-Sanctions will displace Russian flows elsewhere
Russia will struggle to sell more oil to non-EU buyers than it currently does, and its nearly 7.5 million bpd of crude and refined product exports ‘could be jeopardized in 2023,’ Mathonniere said.
‘Energy Intelligence expects a global loss of 1.1 million bpd of Russian oil after the EU crude ban enters into force on Dec. 5, in line with consensus market estimates,’ he added.
So far, he said, only China, India and Turkiye have increased their intake of heavily discounted Russian barrels, becoming de facto the largest buyers.. but all three countries are now facing constraints.
Sanctions will displace Russian flows elsewhere, but it is uncertain how much more Russian crude the alternative buyers can take, he added.
-Russia’s potential countermove to stop exports may increase oil prices
Valery Konyushenko, the chief financial officer (CFO) of the oil and gas company Mazarine Energy, stressed that the Russian reaction to the price caps is ‘quite difficult to anticipate.’
‘If Russia, as they publicly announced, decides to stop any supply of crude to those countries that implement the cap, that basically means that there will be effectively a reduction of Russian production,’ he said.
According to Konyushenko, if Russia scales back production, it will lead to less market supply and push oil prices higher.
On the other hand, if Russia decides to continue supplies, Konyushenko believes the market will be more balanced.
‘I think it is more likely that Russia will opt to reduce production rather than comply with these constraints,’ he said.
