Global oil markets have continued to evolve in the year since the Russia-Ukraine war erupted on Feb. 24, last year, having faced an unprecedented energy crisis with unfolding sanctions, restrictions, and price caps on Russian oil exports, leading to major changes in traditional trading routes.
The war shook the global oil market at a time when global crude oil markets were battling with post-pandemic supply and demand issues and global economies were grappling with rising inflation.
With the aim of undercutting Russia’s wartime spending, Western nations imposed sanctions and severe economic restrictions on oil and gas exports from Russia, the world’s second-largest oil producer.
Due to these sanctions, oil prices reached record highs, raising concerns that Moscow’s retaliatory measures could hamper oil demand.
Brent oil, which had traded at $98.71 on Feb. 23, a day before the war, hit its highest level since July 2008 on March 7, reaching $139.13. WTI crude oil traded at $130.50 on the same day.
However, after surging to record highs in the first half of the year, Brent fell in the second half due to China-induced demand concerns that gained an advantage over Russia, causing supply concerns on global markets.
The price per barrel of Brent dropped to as low as $75.64 on Dec. 9.
– Further sanctions, further supply concerns
The European Union (EU) and G7 countries were the fiercest critics of Russia during its war with Ukraine.
On June 3, the bloc voted on the sixth round of sanctions, adding to hundreds of other embargoes on Russia but this time targeting the country’s crude oil and petroleum products.
After a transitional period, EU countries stopped importing crude oil by sea from Russia on Dec. 5 last year and refined petroleum products two months later, on Feb. 5.
The first round of sanctions against Russia, which it promised would be reciprocal, took effect in December with the implementation of the first batch of oil export embargoes.
In January of last year, a month before the war began, EU countries imported an average of 2.4 million barrels per day (bpd) of crude oil from Russia. However, this quantity fell to 1 million barrels at the end of December and then to 600,000 barrels in January of this year.
Russian exports of petroleum products were also negatively impacted even before the EU ban on oil products that started on Feb. 5. In January of last year, the EU imported approximately 1.5 million barrels per day (bpd), which fell to 1.2 million bpd in December and then to 700,000 bpd the following month.
In order to squeeze Russia’s war budget even further, the EU and G7 countries imposed a price cap of $60 per barrel on Russian crude oil, $100 per barrel on premium Russian oil products such as diesel, and $45 per barrel on discounted products such as fuel oil.
The International Energy Agency (IEA) noted in its oil report published last month that it is still unclear whether EU sanctions will have a significant impact on Russia’s oil industry and predicted that in the first quarter of this year, about 1 million barrels of Russian oil will be removed from the market as a result of the sanctions.
Following the economic sanctions imposed by the US and EU on Russia, several oil majors, including Shell, bp, Totalenergies, ExxonMobil, Eni, and Equinor, chose to withdraw their investments in the country.
– Emergency stockpiles are in play to solve supply declines
The world’s largest oil producer, the US, announced in March last year that it would offer 180 million barrels of crude oil from the country’s strategic oil reserves to the market in response to surging oil prices that reached record highs and harmed economies.
The US move temporarily curbed prices. However, the sale of such a considerable quantity of the country’s emergency stockpiles, which plummeted to their lowest level since December 1983, sparked debate.
Along with the US, some IEA member countries also decided to sell crude oil from their emergency stockpiles to the market to ensure market stability in the face of the Russia-Ukraine war.
In an effort to find a solution to supply disruptions and rising oil prices, the US has also urged OPEC+ countries to increase production. Ignoring the US’s insistent calls, the world’s largest oil producing countries decided to reduce output by 2 million bpd by October 2022, echoing China’s COVID-related demand weakness.
– Imminent retaliation from Russia
While Western nations lined up to enforce sanctions, Russia retaliated by imposing a ban on oil supplies to countries and companies that were in support of price caps.
The decision, which came into effect on Feb. 1, prohibits the supply of Russian crude oil and oil products if contracts directly or indirectly abide by the price cap.
On Feb. 10, Russian Deputy Prime Minister Alexander Novak said Russia would cut crude oil production by 500,000 barrels per day in March.
Novak later announced that his country plans to send most of its oil exports to non-sanctioning countries.
Russia will sell 80% of its crude oil and condensate and 75% of its refined products to ‘friendly’ countries, Novak said.
Despite sanctions, Russia’s exports increased by 7.6% last year to around 4.9 million barrels per day (bpd), according to the country’s premier, who added that Russia would produce around 10.75 million bpd in 2022.
According to IEA data, Russia produced around 10.5 million barrels of oil in 2021.
Russia is concentrating its efforts on India and China.
- Changes in trade routes
Western sanctions and Russian retaliation also resulted in significant changes in global oil trade routes.
The EU had been attempting to replace Russian crude imports by sea with more purchases from the Middle East, West Africa, Norway, Brazil and Guyana, while Russia redirected its sales mostly to Asian countries with a high reliance on imported oil, including China and India.
India upped its crude oil imports from Russia to an all-time high of 1.6 million barrels in January, from an average of 900,000 barrels per day in 2016, according to the IEA oil market report.
China’s daily imports, meanwhile, jumped to 2.3 million bpd from an average of 1.9 million bpd the previous year.
