In the early hours of Tuesday morning, the leaders of the 27 EU member states agreed to ban imports of Russian oil by sea.
To appease landlocked countries like Hungary, pipeline shipments will continue for the time being. But Germany and Poland’s willingness to cut gas pipeline purchases by the end of 2022, combined with a maritime ban, should see Russian oil exports to the EU fall by 90% by the end of the year.
While the gradual entry will alleviate the disruption caused by the ban, Florian Thaler, CEO of OilX, an oil analysis company, said the impact would still be “very consistent”.
While there are short-term winners, such as refineries connected to the Druzhba pipeline, the push to rid Europe of Russian oil will shake up its hydrocarbon industry and global crude oil markets.
“Competition for the remaining barrels in a global market that is already widespread will be fierce and there will be very limited margin to alleviate oil prices,” Thaler said.
How will the ban affect oil markets?
Oil prices elsewhere will rise as European refineries quickly seek replacement supplies.
In May, about 500,000 barrels of Russian crude oil were still arriving in northwestern Europe, according to Vortexa, a maritime analytics firm. Although this is a marked decline in the 1.4 million barrels that Vortexa said every day before the Russian invasion of Ukraine, shipments to Mediterranean countries such as Italy have increased since February 26, although part of these supplies will go to Turkey.
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Meanwhile, Russia, which produced more than 10 percent of the world’s oil supply before the crisis, will have to find new buyers for its barrels, or international oil markets could be dangerously inadequate, analysts say.
India has already increased its purchases and China is expected to import more as its major cities emerge from the Covid-19 blockades. But there are still big questions about how much Russian oil they can absorb, either because of the refineries in the Russian-grade refineries or because of the desire to diversify their suppliers.
Millions of barrels of Russian oil float on ships with ship destinations set as “unknown,” suggesting cargoes may be struggling to find buyers.
The International Energy Agency has forecast that Russian production could fall by up to 3 million b / d. Some analysts see a drop of less than 1 to 1.5 million b / d. But even this lower figure could still be enough to greatly raise oil prices.
Are there still problems in overcoming Member States?
An immediate problem is what to do with Russian-owned refineries that are responsible for 10 percent of the block’s capacity. Western funding for these plants, which collectively refine about 1.2 million b / d, has been exhausted by fear of sanctions, leaving them dependent on receiving crude directly from their parent companies, including Rosneft. and Lukoil, the largest privately held. Russian oil producer.
Without access to Russian offshore oil, there is a real risk that these refineries will be shut down soon, exacerbating the fuel crisis in the EU. Diesel supplies, in particular, are already tight, leading to record prices at the pump in many countries.
“Governments will have to intervene, possibly with nationalization, to keep them running and ensure energy security and jobs,” said Simone Tagliapietra, a senior member of Bruegel, a Brussels think tank.
Authorities have so far remained silent on whether to act, however, while EU law does not talk about property.
Who benefits from the ban?
Refineries in countries such as Hungary, with access to the Druzhba or “friendship” pipeline that transports crude oil from Russia, will be strengthened in the short term.
The Urals, Russia’s main export, traded at $ 95 a barrel on Tuesday, just under $ 30 cheaper than Brent. With the sale of fuels such as diesel and gasoline at international prices, refineries that can still access Russian oil by pipeline will get spectacular margins.
According to FT calculations, MOL, backed by the state of Hungary, which operates the country’s only refinery, could earn more than $ 2 billion in 12 months just by discounting the Urals at its Danube plant. .
What comes next?
The agreement reached at the Brussels summit leaves a number of questions open about the specifics of the new regime, which will have to be resolved in the coming days and weeks.
Among the most divisible is how to ensure that all member states decide when to close the temporary exclusion for shipments via pipelines. Member States will be watching closely Hungary, given Prime Minister Viktor Orbán’s combative approach to the ban.
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The EU could consider sanctions on other key Russian exports, although officials downplay the prospects that the bloc will target natural gas.
Supporters of the gas ban, such as Estonian Prime Minister Kaja Kallas, acknowledge that they are facing a difficult battle given the cost reductions that supplies would impose on the EU economy. Speaking to reporters in Brussels on Tuesday, Kallas said: “I think the gas should be in the seventh package. [of sanctions]but I am also realistic; I don’t think so. “
The European Commission estimated earlier this month that a total cut in Russia’s gas supply this year would slow EU growth by 2.5 percentage points to 0.2 percent.
Ursula von der Leyen, chair of the commission, said on Tuesday that “much” of energy sanctions were already in place, and that the commission may need to focus more on closing gaps and tackling evasions.