Can Russian Oil Exports be Replaced?

The direction of the Russia – Ukraine conflict remains the key driver of oil prices in the near-term, with appetite for country-level sanctions and self-sanctioning ultimately a derivative of conditions on the ground in Ukraine. De-escalation and détente would see significant risk premium erased from the front of the Brent curve, with front month prices likely back below $100/bbl. However, a continuation of conflict sees sanctions risk growing, especially as Russian forces approach major population centres. As such, prices will swing dramatically on newsflow between the extremes. In this note, we dig into the potential volume of Russian crude loss due to self-sanctioning and a potential expansion of country-level sanctions, and then discuss replacement options. Whilst we conclude that sufficient barrels are theoretically in place to fully offset the loss of Russia’s crude exports to Europe, the speed at which these barrels could come to market is too slow compared to the immediate loss of Russian volumes . As such, in a scenar io which saw the full sanction, we aponisation or greater self-sanctioning than anticipated of Russian barrels to Europe, the oil market would be forced to resort to demand destruction . After all, t he oil supply reaction function always lags demand. This would come at meaningfully higher oil prices than our current base-case given the inelasticity of oil demand to price in the short-run.