On Tuesday night, EU member states entered into an agreement that could have major consequences for the world oil market:
The EU will cut 90 percent of Russian oil imports by 2022.
It happened after a compromise with Hungary, which together with Slovakia and the Czech Republic will have extra time to phase out Russian oil.
– The EU has two motivations: one moral and one business. The moral is that they do not have the conscience to pump billions of kroner into Russia, which contributes to crushing Ukraine. The business is about Russia getting worse advice and less money in the coffers, says Bjarne Schieldrop, chief analyst for raw materials at SEB.
About two-thirds of Russian oil comes to Europe by sea, while about one-third through the Druzhbar pipeline.
Do not want Russia’s exports to fall further
According to the research center CREA, which monitors Russia’s exports of oil, gas and coal to Europe, the EU has paid around NOK 300 billion for Russian oil since the outbreak of the war.
Chief analyst Schieldrop explains that the EU’s goals does not is that Russia will export less oil, as the world as of 2022 is completely dependent on Russian volumes.
On the other hand, the EU’s plan is for Putin’s war machine to get a worse price per barrel of oil – and thus be hit hard financially.
– The EU countries now want Europe not to accept oil by boat from Russia. They hope it flows to Asia instead. There, for example, India may say that they will not buy the oil for more than 50-60 dollars per barrel. Thus, Russia can sell the oil, but they do not get paid as well, says Schieldrop.
See visualization of who has bought the most oil, coal and gas from Russia after the outbreak of the war:
– A few weeks ago talked you about an energy war between “good oil” and “bad oil”. How much discount do you get if you buy “bad oil” in the future?
– That discount is not that big. If you buy Russian oil, you must have a boat and insurance on the oil being transported. Both shipping and insurance are far more expensive than before. Of the rebate that such a country as India can charge at $ 30 per barrel, half disappears in increased costs of shipping and insurance.
Predict chaos in the oil market
When Europe no longer wants to buy Russian oil, and Russia can no longer sell oil the shortest way to Europe, the world’s energy systems are facing a real upheaval.
– We will see a situation where Russia’s oil is sold to Asia, while Europe will have to buy more oil from the USA and the Middle East. Normally, the oil is sent in a simple way from Russia to Europe and from the Middle East to Asia. Now we are going to see big upheavals in the oil market, and there will be a total chaos when “Correct” oil should arrive “Proper” refinery.
The SEB analyst says that the oil refineries that convert crude oil into, for example, diesel and petrol have fine-tuned production to specific types of oil – such as Ural oil or North Sea oil.
– When you sanction the world’s largest exporter of fossil energy, it does not happen without major consequences for the global market for fossil energy.
Schieldrop predicts that oil prices will rise. Demand for oil is rising, especially now that the start of the “driving season” is approaching – the time when oil demand in the northern hemisphere is at its highest.
– For Norway, this is like Christmas Eve and New Year’s Eve at the same time, says the SEB analyst, who believes an oil price of between 120 and 150 dollars a barrel can be a reasonable level going forward.
Can lose over two billion kroner daily
Chief economist Torbjørn Kjus in Aker ASA points out a number of factors that can pull the oil price up or down. Part of the price increase has taken place in advance, because the boycott decision was expected, he states. But even though exports are already lower, Russia’s revenues have been almost as high as last year:
– Russia exported 7.5 million barrels of oil daily in 2021. Exports could be 4.5 million barrels a day if Asia does not take any of what tends to go to the EU and the US. But Asia wants to take part, they already do. We can perhaps expect 2.0-2.5 million barrels of lower exports from Russia at most, says Kjus, who estimates 1.5-2 million barrels of lower exports after the embargo from the EU is fully implemented.
A net export loss of 2 million barrels of oil per day corresponds to about NOK 2.25 billion daily in lost revenue with current oil prices.
Russia’s exports last year were 7.5 million barrels a day – but a year ago the price of crude oil was 70 dollars. Lost exports are therefore partly offset by increased prices.
Like Bjarne Schieldrop, Kjus points out that oil must be sold at a heavily discounted price for Russia to find a recipient country in Asia, and logistics challenges in shipping traffic complicate the process. In addition, there may be new reactions, the chief economist believes:
– What will the Americans do if China increases imports sharply? There may be new, secondary sanctions, says Kjus.
China and the United States are influencing
Manufacturers such as Iran and Venezuela, which can contribute more oil to the market, are still affected by sanctions that limit their exports, Kjus points out. Increased shale oil production in the US may cover some of the global market needs.
But demand is not yet at the level from before the pandemic, Kjus points out. China is increasingly affected by Covid shutdowns, which are driving down demand from the world’s most populous nation. There are fears of a recession in the US due to a sharp rise in interest rates and inflation – a recession will also dampen demand.
– So if all the downside factors strike, we can actually also get a price drop, says Kjus.
But most likely, effects in the form of strong price pressure will come towards the winter, the chief economist believes:
– There will be less exports from Russia anyway. But the sanctions are not introduced immediately. You have six months to cut crude oil, and eight to cut refined products. The second half of the year can therefore be super tight, and can potentially give record prices, says Torbjørn Kjus.
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