The World May Need That Russian Oil Output Cut After All

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The world is about to lose a lot of Russian crude when European Union sanctions and a US-led price cap take effect in 29 days. That might not be a bad thing.

How big can the loss be? Perhaps much less than many fear.

EU countries will halt most seaborne imports of Russian crude on December 5, with pipeline flows to Poland and Germany halted until the end of the year. Supplies to Europe have already halved what they were before President Vladimir Putin sent troops into Ukraine in February, with most of the rest diverted to China, India and Turkey.

Depending on how successful Moscow is in finding new buyers – a tanker of its crude was just unloaded at Abu Dhabi’s Ruwais refinery, potentially opening a new outlet – EU sanctions will reduce flows by at most 700,000 barrels per day. Pipeline deliveries to Poland and Germany were about 650,000 barrels per day last year. So the total directly at risk would bring the maximum to about 1.35 million barrels per day.

The bigger concern is that bans on providing supplies, insurance and other services to the Russian oil trade could reduce flows to non-European countries, where much larger volumes are at stake. But it is increasingly likely that they will simply direct the trade to non-European ships insured in Russia or the buyer’s country.

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The price ceiling, defended by the US, is intended to provide a safety valve allowing buyers to continue to have access to European ships and insurance if the price they pay for cargo is below a yet-to-be-determined level.

I doubt it will have any real impact. Countries that have signed the restriction have also banned purchases of Russian crude oil. Buyers who have not opted in will be reluctant to do so. Russia has repeatedly said it will not sell oil to countries that cap its prices, and there are no sanctions to circumvent the US initiative.

Russia’s remaining buyers may gain little negotiating leverage, but that’s due to a shrinking pool of refiners willing to process Moscow crude, not the cap. China, India and Turkey, now the biggest buyers of Russian crude oil, will not risk trade to please Washington.

So I don’t think Russian crude oil flows to non-European countries will be affected by the sanctions.

The world may find it much easier to deal with the loss of at most 1.35 million barrels per day of Russian crude than feared when the sanctions were first proposed. In fact, he might welcome it.

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On the supply side, the output cut by the OPEC+ group of oil producers, of which Russia is a key member, will not come close to the 2 million bpd headline figure they announced last month. Most analysts estimate the actual cut at about half that level. I think it could be even smaller once you factor in the production recovery in Kazakhstan and Nigeria, which will offset the real production cuts likely to be made only by Saudi Arabia, Kuwait and the United Arab Emirates.

On the other side of the balance sheet, oil consumption is falling, hit by high prices, a strong US dollar and the determination of central banks to fight rampant inflation, even at the expense of economic growth.

This is not just my view. Russell Hardy, chief executive of the world’s largest independent oil trader Vitol Group, says “we will continue to see demand decline for several months.” Ed Morse, global head of commodities research at Citigroup Inc., sees oil demand “down around the world.”

The reopening of China’s economy could change that picture, but hopes on Friday for an easing of China’s Covid restrictions may be premature, according to Bloomberg Intelligence.

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The International Energy Agency, which now sees global oil demand in the current quarter 300,000 bpd below the same period last year, cut its forecast for consumption next year by 550,000 bpd.

To balance supply and demand, the world will need 29 million bpd of crude from OPEC members in the coming months, even with the loss of 1 million bpd in Russian supplies since December. With a modest production recovery in Nigeria already underway, this is pretty much exactly what the group is likely to pump out if its members do not exceed their new targets.

If Russian supply does not fall, the crude oil market looks oversupplied in the coming months.

More from Bloomberg Opinion:

• Russia’s Big Concern Is Finding Oil Buyers: Features by Julian Lee

• How the US and Saudi Arabia can overcome the latest OPEC+ dispute: Hussein Ibish

• Vladimir Putin’s Guide to Alienating Allies: Clara F. Marquez

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg First Word. He was previously a senior analyst at the Center for Global Energy Studies.

More stories like this can be found at bloomberg.com/opinion

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