Prof. ST Hsieh
Director, US-China Energy Industry Forum
May 31, 2022
Ukraine war is in a stalemate, but in favor of Russia now. EU is struggling to choke Russian economy with sanctions against Russia and at the same time provide more and more military equipment to Ukraine. However, there is no cease fire in sight because US calls all shots for Ukraine but US is not dealing with Russia at all. EU is designing new and more harsh sanctions against Russia, but it cuts both ways. Unfortunately, EU has to make compromises, as the unity of EU is being challenged. If the war drags on and global economy keeps suffering, the burden of sanctions is difficult to distribute equitably among EU nations. A major challenge is the Ukraine war has already broken the geopolitical status quo of the world, but there is no vision or effort in building the next global order. The US being the strongest power in the world is directly engaged in the war by providing financial and military equipment to Ukraine. There is no direct communication between Biden and Putin on any issue, the leaders with the most powerful military mights include nuclear arsenals.
However, the war has already caused transformation of global energy market; it is unfolding and consequences can be significant. In terms of global oil market, we note the following reports.
- Brent crude rose above $123 a barrel on Tuesday (May 31, 2022), the highest it has been for two months. Prices for oil and gas have soared in recent months, fueled by the lifting of lockdowns and the Ukraine war.
- EU Sanctions against Russian oil will take full effect at the end of 2022, six months away. The cost of living crisis being felt across Europe has not helped either. Sky-rocketing energy prices – among other things – have curtailed some EU countries’ appetite for sanctions which could also hurt their own economies.
- EU is destined to shun Russian oil, so it looks west for US oil export. But US oil via tankers will be costly. Although US is a net energy exporter, it has very limited spare oil capacity for export. Further, US has not been able to raise domestic crude productions quickly. Biden has announced this spring that US is ready to release one million barrels per day from US SPR.
- Russia then looks to the east for diversifying its oil market from EU. Russia also offers discount so China and India will benefit for the short term.
- It will take time, even after the Ukraine war is over, for the global oil market to reach a new equilibrium where price will be determined by supply and demand.
Oil price rises as EU cuts Russian imports
By Noor Nanji Business reporter, BBC News May31, 2022
Brent crude rose above $123 a barrel on Tuesday, the highest it has been for two months.
Prices for oil and gas have soared in recent months, fuelled by the lifting of lockdowns and the Ukraine war.
Rising energy costs are putting pressure on consumers, making it more expensive to heat homes and drive.
Petrol hit a new record of 173.02p a litre on Monday, according to the AA.
At the same time, the average price of diesel in the UK rose to 182.58p a litre, it said.
Filling a typical 55-litre tank of a diesel now costs more than £100.
The war in Ukraine has pushed countries in the West to shun Russian energy supplies.
The ban agreed by EU leaders will see an immediate ban on Russian oil being transported into the bloc by sea. Two-thirds of Russian oil arrives by sea.
However, the deal, which followed weeks of wrangling, includes a temporary exemption for pipeline oil following opposition from Hungary.
Pledges by Poland and Germany to stop importing pipeline oil by the end of this year will raise coverage of the ban to 90% of Russian imports.
Brent crude, the global benchmark for oil prices, has risen more than 70% over the past year.
Oil prices climbed again on news of the EU embargo, with Brent crude reaching its highest level since March.
Russ Mould, investment director at AJ Bell, said confirmation that the EU will cut its purchases of Russian oil by the end of 2022 is pushing up prices because European countries now need to find alternative sources of supply.
“It is not feasible to replace that amount of energy with other fuel sources, such as wind, solar, biomass or nuclear, in such a short space of time, so the EU needs to find oil and gas from somewhere,” Mr Mould said.
“This will not be easy because existing global output may well be on contract already, so competition for what is not on contract will now be hotter.”
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the upwards trajectory of oil prices may continue until Western countries outline clearly how supply is going to be sourced.
“It’s possible this could get tougher before it gets better,” she said.
“We know that rising energy costs are a particular challenge for households which already have severe pressure on their incomes, but smaller businesses shouldn’t be left out of the equation either – this is a tough time to be heating offices, and at a time when it’s meant to be about rebuilding resilience after the pandemic.”
European Council chief Charles Michel said the deal cut off “a huge source of financing” for the Russian war machine.
It is part of a sixth package of sanctions approved at a summit in Brussels, which all 27 member states have had to agree on.
So far, no sanctions on Russian gas exports to the EU have been put in place, although plans to open a new gas pipeline from Russia to Germany have been frozen.
EU members spent hours struggling to resolve their differences over the ban on Russian oil imports.
Hungary, which imports 65% of its oil from Russia through pipelines, resisted the new round of sanctions.
The cost of living crisis being felt across Europe has not helped either. Sky-rocketing energy prices – among other things – have curtailed some EU countries’ appetite for sanctions which could also hurt their own economies.
How The Ukraine War Completely Upended Global Crude Flows
Tue, May 31, 2022, 3:00 PM
The Russian invasion of Ukraine has changed global oil trade routes forever.
In one of the most significant rerouting of oil flows in recent decades, Europe is now looking to haul in growing volumes of non-Russian crude, while Russia—shunned in the West—is looking East for its next top exporting market.
The Russian war in Ukraine and the sanctions from the United States, the United Kingdom, and the European Union that followed upended the entire global oil supply chain. The closest neighbors geographically—Europe and Russia—are now each looking in the other direction for supply and export routes.
Altered Oil Routes
The changes to oil flows are already evident three months after Russia invaded Ukraine. Europe is now importing record volumes of U.S. crude, North Sea crude, and is attracting more barrels of light sweet crude from West Africa as its governments try to reduce—and ultimately eliminate—its dependence on Russian oil. Moreover, trading houses, insurers, reinsurers, and tanker owners based in the UK and the EU avoid dealing with Russian oil supplies to comply with the current and future sanctions on Russia’s oil exports.
Europe’s challenge to cut off dependence on Russian oil has been evident over the past month as the EU took weeks to agree on some sort of a compromise on a Russian oil embargo. From banning all Russian oil imports, via any means, effective by the end of 2022, the initial proposal of the European Commission was eventually watered down to an agreement on a ban on seaborne imports by the end of the year with an exemption for pipeline crude.
The sixth package of EU sanctions against Russia will immediately impact 75% of Russian oil imports, and by the end of the year, 90% of the Russian oil imported by Europe will be banned, Charles Michel, President of the European Council, said early on Tuesday after the EU reached an agreement to start banning Russian oil imports.
This will further upend global oil flows as Europe will be seeking much more seaborne crude from outside Russia, its largest oil supplier before the war. The ban also means that Russia will have to double down on its efforts to sell more of its crude to Asia, primarily to China and India, in the absence of its biggest market so far, Europe.
Europe Looks West
To replace Russian crude, Europe is increasingly looking at more supply from the UK and Norway’s North Sea crude, more supply from the United States, and barrels from West African producers. In April, the United States shipped the highest volume of crude to Europe since the U.S. lifted a ban on crude exports in 2016, ship-tracking data compiled by Bloomberg showed.
Europe imported around 1.45 million barrels per day (bpd) of American crude in May, which is up 15% compared to March, according to data and analytics company Kpler cited by Reuters.
Europe is also significantly raising imports of crude from or via North Africa and from West Africa, tanker-tracking firm Petro-Logistics told Reuters. Nigeria and Angola are boosting their exports to Europe, which has sent Nigerian crude prices rising to record premiums to Dated Brent. Nigeria’s Forcados and Escravos crudes have been recently offered at a premium of $8 a barrel over Dated Brent, traders told Reuters on Monday. That’s the highest-ever premium for Nigerian crudes, per Refinitiv Eikon data.
Russia Looks East
The increase in sales of African crude in Europe comes at the expense of lower African sales in Asia, where India and China are buying heavily discounted Russian crude barrels.
Asian buyers are Russia’s chance to reroute its oil away from Europe, where Russian crude is no longer wanted. Russian exports to India and China have jumped, replacing part of the West African crude that has typically flown to India.
The world’s third-largest oil importer, India, saw its imports of West African crude nearly halve in April compared to March, Petro-Logistics President Mark Gerber told Reuters.
India’s overall crude oil imports jumped by 15% in April year on year, Petro-Logistics said earlier this month.
“Big increases from Middle East at the expense of African barrels which have increasingly gone to Europe. Russia supplying record volumes to India,” Petro-Logistics noted.
In India, cheap Russian crude oil is attracting price-sensitive buyers to the point that Russia became the fourth largest oil supplier to India in April, moving up from 10th place in March.
India is set to import record volumes of Russian crude in May and June, at 24 million barrels and 28 million barrels, respectively, up from 7.2 million barrels in April, the previous record for imported Russian oil, per Refinitiv Eikon data cited by Reuters.
The significant increase in India’s purchases of Russian crude has already drawn the attention of the United States, which has reportedly sent a U.S. federal government official to discuss U.S. sanctions on Russia and try to convince India to reduce its purchases of Russian oil.
Russia is also exporting an estimated 400,000 bpd—mostly to Asia—via ship-to-ship transfers from smaller vessels to supertankers in the Mediterranean, according to Petro-Logistics.
Even if Asia cannot fully replace all the oil exports Russia will be losing in Europe, Russian oil shipments to India and China are set to further increase in the coming months, barring a diplomatic intervention from the West to persuade India not to boost Russian imports too much. At any rate, crude trade flows have changed forever—Europe looks to Africa and the U.S., while Russia pins its hopes on India and China.
By Tsvetana Paraskova for Oilprice.com