- February 24 marks the 1-year anniversary of the Russian invasion of Ukraine
- Russian oil exports remain nearly unchanged from a year ago
- Higher reliance on Saudi Arabia and Iraq from the West will likely bring new geopolitical challenges
We are rapidly approaching the 1-year anniversary of Russia’s invasion of Ukraine. With this invasion came EU and U.S. sanctions on Russian oil and natural gas. These sanctions have significantly reshaped the global oil market. Here is a look at what has changed and what we can expect in the future.
1. Russia’s Customer Base
Data from TankerTrackers.com shows that while the total volume of Russian oil exports hasn’t been reduced, Russia is exporting to fewer customers. In November 2021, Russia’s largest customers were China and the Netherlands, which imported 18% and 15% of Russia’s oil exports, respectively. The rest of Russia’s oil was exported to 24 other countries, with no country accounting for more than 8%. In comparison, in November 2022, Russia exported to only 11 different countries. India, a brand-new market for Russia, imported 38% of Russia’s oil, and China imported 28%.
It might seem like this lack of diversity is bad for Russia’s oil industry because India and China have the leverage to drive down prices. But the price of Russian oil is already discounted heavily compared to the price of Brent. As oil prices rise, cheap Russian oil will become even more valuable to India and China.
These countries would see their economic development plummet if they had to pay $100 per barrel or more for oil. The availability of cheap Russian oil keeps their economies going, which in turn gives Russia a bit more leverage to raise prices or push for other concessions from these countries.
2. Russia’s Energy Revenues
The sanctions and price cap policies were designed to keep a certain amount of Russian oil on the market while reducing the revenue Russia could generate from oil sales.
Urals blend oil has been trading at a more significant discount to Brent than it was before the invasion, but indications are that Russia is still making more money than expected. Goldman Sachs believes that China, India, and others have actually been paying higher prices for Russian oil than what was quoted in price assessments.
In addition, Russia has been earning money selling services like insurance and shipping along with its crude oil. According to Kpler, Russia could be earning more than $60 per barrel on its oil when the associated charges are included, rather than the $38 per barrel that Russian oil was reportedly trading for.
Reuters reports that Russia plans to cut its oil production by 500,000 bpd in March. The price of Brent immediately rose, but whether this will result in an increase in the price India and China pay for Russian oil remains to be seen.
Russia ran a $25 billion deficit for January, though it still has an $8 billion account surplus. The longer these sanctions and price caps remain in place, the more incentive Russia has to invest in its own “shadow” oil trading and shipping industry.
Prices will be lower, and services may be of lesser quality than those on the open global market. Still, Russia will likely be able to increase its revenues and potentially make up for lost oil revenue this way.
3. Impact on Europe and the U.S.
Europe is buying more from Saudi Arabia and Iraq without Russian oil.
In July 2022, Europe imported over 2.2 million bpd of oil from the Middle East—an increase of 90% since January 2022. This trend will likely continue and will bring with it geopolitical challenges.
Regarding natural gas, Europe has managed to get through this winter without severe consequences because temperatures have been milder than usual. However, if temperatures soar this summer or are colder than normal next winter, Europe will feel the loss of Russian natural gas more acutely.
Europe must continue to build more LNG re-gasification terminals in anticipation of high demand in the future unless they want to burn even more coal.
In the U.S., only the northeastern region saw some low inventories and shortages in diesel fuel due to the Russian oil sanctions. Typically, this region has a robust trade with Europe. Still, because Europe is no longer buying Russian petroleum products, they aren’t exporting as much diesel fuel to the U.S. Refinery capacity in the northeastern U.S. is low due to recent refinery closures.
There still are significant hurdles to transporting diesel from other areas of the U.S. to the northeast due to a lack of pipeline capacity and restrictions on shipping from the Jones Act. The northeast will continue to face potential shortages in gasoline and diesel this summer and may see shortages in heating oil next winter if temperatures are colder than normal.
The U.S. also benefitted from milder temperatures this winter and did not experience shortages in natural gas. However, if next winter is colder in Europe and the U.S., natural gas prices could be much higher as more gas is needed domestically and more gas is liquified and exported to Europe.
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Disclosure: The author does not own any of the securities mentioned in this article.