Oil&Gas Sector News - EU considering import ban on all Russian oil

What is being discussed?
What seemed unthinkable only a few weeks ago looks imminent - the EU is discussing this week to include an import ban on Russian crude oil and oil products in its sixth package of penalties against Russia. Despite strong resistance to the idea of banning Russian crude oil (and gas) from some EU countries with a higher reliance on Russian energy sources (i.e. Hungary, Slovakia, but also Germany until recently), the EC has finally proposed to phase-out the supply of crude oil and refining products in an orderly fashion. Based on the current discussions, Brussels is reportedly looking into phasing out oil imports within six months and oil products by the end of the year. At the same time, some countries (i.e. Hungary, Slovakia) might be given more time to switch to alternative sources of crude oil supply or even be exempted from the import ban.

How dependent is the EU on Russian crude oil and refined products?
Last year, Europe imported some 2.7 mn bbl/d of crude from Russia, of which 0.7 mn bbl/d (ca. 25%) was delivered via the Druzhba pipeline and ca. 2.0 mn bbl/d via sea (details on page 2). Additionally, Europe purchased ca. 2.0 mn bbl/d of refining products (mainly gasoil and fuel oil).

How much of Russian oil exports has been already affected by (self-)sanctions?
According to Reuters, which relies on oil shipping data and oil traders, oil exports of Russian seaborne oil from Baltic ports stood at 2.3 mn bbl/d (ca. 70% of the 2021 average exports to Europe), which is a 20% increase vs. March. Assuming that oil exports to Europe by pipes and to China (by pipes and seaborne) remained at the pre-war level, the global oil market might be lacking less than 1.5 mn bbl/d of Russian crude so far. With US bans on imports of Russian crude and products becoming effective on April 22, another 0.2 mn bbl/d of RU crude exports might be impacted. Moreover, despite the 35% discount to Brent, which incentivises refiners to continue buying Russian crude, oil traders (i.e. Trafigura, Gunvor, Glencore) have reportedly stated that they intend to cut purchases of Russian crude by May 15 in order to prepare for new sanctions against Russia.

How could the oil price react to the EUs ban of all Russian oil?
Although an EU embargo phasing in by the end of the year would provide more time to secure oil from alternative markets, as well as to address some logistics bottlenecks or engage in a more intense dialogue with potential suppliers (i.e. OPEC, Iran), it would be naive not to expect an even tighter market at least in the short run. Redirecting its oil exports to China and India might only partially offset the impact on other markets, due to constraints with shipping capacities and less demand for Russian grades in India, for example. Therefore, the impact on the oil price will depend on how the supply and demand sides respond. Assuming that China and India increase their purchases of Russian crude and OPEC, which has sufficient spare production capacity to replace all the crude the EU buys from Russia, agrees to increase its oil output faster, we might expect only a minor impact on the oil price. Moreover, with an increased risk of slower economic growth globally, the currently forecast growth of oil demand of 1.8 mn bbl/d in 2022e could be also at risk and thus remove some of the pressure from the oil price. More challenging for Europe, however, would be the ban on imports of Russian oil products, namely diesel and jet fuels. The market for middle distillates in Europe is already very tight (crack spreads on diesel are currently above USD 85/bbl vs. USD 17/bbl in January), while global inventories of middle distillates are at multi-year lows. Switching to alternative sources of crude from refineries which were designed to process Russian grades could lower refining yields, while we are approaching high driving season.