Jan 11 2023
The EU's ban on Russian oil product exports on Feb. 5 will transform markets and change trade flows in a manner more complex than the impact of the sanctions on seaborne Russian crude that came into force on Dec. 5, chief energy economist at the International Energy Agency said Jan. 11.
"We need to be very watchful because the reconfiguration in global trade implicit in that oil product ban is going to be significantly more complex than what we have seen already on the crude side," Tim Gould said at the 13th Global UAE Energy Forum organized online by Dubai-based Gulf Intelligence.
"When it comes to products, it's a more complex situation because as we are all aware, China and India are both oil product exporters, so you are not going to have the same, in a sense, safety valve for oil products as you do for crude."
The G7 slapped a $60/b price cap on Russian crude alongside EU's own embargo on seaborne Russian crude exports on Dec. 5 in response to the invasion of Ukraine.
"We are going to need to have a very complex reconfiguration of flows also in the Atlantic Basin with Europe taking more from Middle Eastern suppliers and from North America, and then potentially Russian oil product exports finding a home in parts of Latin America or in Africa," Gould said.
"None of that is simple, there are quality specification issues. There are all sorts of tankers and storage issues that would make that very complicated."
European refiners turned to crude grades from Norway, the US, Saudi Arabia, Guyana and Azerbaijan in 2022 to plug the growing gap left by Russian imports sidelined by Western sanctions on Moscow, according to tanker tracking data.
Russian seaborne crude imports into the EU, Norway and the UK shrank by 80%, or 1.36 million b/d, in November and December compared to pre-war levels of 1.71 million b/d, according to data from S&P Global Commodities at Sea.
The IEA is forecasting Russian output will fall by 1.4 million b/d in 2023 due to the impact of EU sanctions and the G7 price cap.
"When we look at oil markets, it is undoubtedly true that Russian production and exports have been more resilient than we initially expected, but of course there are big changes afoot," Gould said.
"It feels unlikely that we will get back to the way things were before in terms of Russia's relationship or position in the international energy world."
Analysts at S&P Global Commodity Insights expect only minimal impact from the West's seaborne crude sanctions on Russian output. Russian supply losses could peak at 930,000 b/d below pre-war levels in March due to pending sanctions on fuel exports before production rebounds 400,000 b/d by the fourth quarter of 2023.
Russia estimates that its oil output may fall 5%-7% in 2023 as a result of the sanctions.
The G7 price cap is another factor that will impact Russian exports in 2023, Gould said.
"We are watching very closely to see the extent to which traders and shippers are incorporating that (G7 price cap) into their decisions already for crude in December," Gould said.
"There is a large degree of uncertainty how this plays out, but I think certainly it is going to be a big factor in the markets in 2023."
Other wild cards in 2023 are the oil demand outlook as a result of China's lifting of COVID-19 restrictions despite a resurgence of the virus and the shape of the global economy, he added.
The IEA expects global oil demand to grow 1.7 million b/d to 101.6 million b/d in 2023, with nearly half of that increment coming from China. Most of the 820,000 b/d oil demand growth in China in 2023 is expected to come in the second half of the year.
The IEA is also keeping the release of oil from strategic stocks as an option in 2023, Gould said.
In 2022, the US initiated the largest drawdown in the history of its Strategic Petroleum Reserves, injecting 905,000 b/d into the market from mid-April through October, with additional drawdowns by other IEA nations raising global SPR flows to about 1.4 million b/d over the same period, according to S&P Global.
The Joe Biden administration announced the SPR drawdown as it sought to shore up global oil supplies, help Europe curb its dependence on Russian oil imports, and ease domestic energy prices contributing to the highest US inflation in 40 years at the time.
"There are still substantial stocks available to IEA member countries that can be deployed in case of necessity, and you can imagine that we will continue to keep a close eye on market developments and potential disruptions this year," Gould said.
"That part of the arsenal is still very much intact. Some countries will look to replenish those stocks as and when it's prudent to do so."