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 US price caps come into effect in 29 days. This may not be a bad thing.

How big could the losses be? Perhaps much less than many fear.

EU countries will suspend most Russian crude oil imports by sea on December 5, and pipeline flows to Poland and Germany will stop until the end of the year. Shipments to Europe are already half of what they were before President Vladimir Putin sent his troops to Ukraine in February, with most of the rest going to China, India and Turkey.

Depending on how successful Moscow is in finding new buyers — its crude tanker has just unloaded at the Ruwais refinery in Abu Dhabi, potentially opening up a new market — EU sanctions will reduce flows by no more than 700,000 barrels a day. Last year, pipeline deliveries to Poland and Germany were around 650,000 barrels per day. This would bring the total directly at risk to about 1.35 million barrels per day.

Of greater concern is that bans on shipping, insurance and other services to trade Russian oil could reduce flows to countries outside Europe, where much larger volumes are at stake. But it is becoming increasingly likely that they will simply shift the trade to non-European vessels insured in Russia or the buyer’s country.

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The price cap, supported by the US, is intended to provide a safety valve, allowing buyers to continue to access European ships and insure if the price they pay for cargo falls below a level yet to be determined.

I doubt it will have any real effect. Countries that have signed the restriction have also banned the purchase of Russian crude oil. No-show buyers won’t want to. Russia has repeatedly said it will not sell oil to countries that cap its prices, and there are no penalties for evading the US initiative.

Other Russian buyers may gain marginal negotiating leverage, but this is due to a decline in the number of refiners willing to process Moscow’s crude, not a cap. China, India and Turkey, now the biggest buyers of Russian crude, will not risk trade to please Washington.

So I don’t think the sanctions will hurt the flow of Russian crude oil to countries outside of Europe.

It may be much easier for the world to cope with the loss of Russian crude, which is no more than 1.35 million barrels per day, than was feared when the sanctions were proposed. It can actually be hailed.

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On the supply side, OPEC+, a key member of which is Russia, will not come close to the 2 million barrels per day output cuts it announced last month. Most analysts estimate the actual decline to be about half that level. I think it could be even lower if you take into account the recovery of production in Kazakhstan and Nigeria, which will offset the real production cuts that will probably only be made by Saudi Arabia, Kuwait and the United Arab Emirates.

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

This is not just my view. Russell Hardy, chief executive of Vitol Group, the world’s largest independent oil trader, says: “we will continue to see demand destruction for a few more months.” Ed Mohr, Citigroup Inc. global head of commodity research, believes demand for oil is “declining globally”.

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

The International Energy Agency, which now sees global oil demand in the current quarter 300,000 barrels per day lower than in the same period last year, has cut its consumption forecast for next year by 550,000 barrels per day.

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To balance supply and demand, the world will need 29 million barrels of crude oil from the Organization of the Petroleum Exporting Countries in the coming months, even if Russian supply drops by 1 million barrels a day from December. With a modest recovery in Nigerian manufacturing already underway, this is almost exactly what the group could pump if its members fall short of their new targets.

If Russian supply does not decrease, the crude oil market looks set to be oversupplied in the coming months.

More from Bloomberg’s opinion:

• Russia’s Big Concern Seeks Oil Buyers: Elements of Julian Lee

• How the US and Saudi Arabia can bypass the latest OPEC+ procedures: 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 of Bloomberg LP and its owners.

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

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