How the EU embargo on Russian oil will shake up global markets

In the early hours of Tuesday morning, leaders of the 27 member states of the European Union agreed to ban imports of Russian seaborne oil.

To calm landlocked countries like Hungary, pipeline deliveries will continue for the time being. But the willingness of Germany and Poland to reduce their pipeline purchases by 2022 should, along with the maritime embargo, reduce Russian oil exports to the European Union by 90 percent by the end of the year.

Although the entry phase will mitigate the disruption caused by the ban, Florian Thaler, CEO of OilX, an oil analytics firm, said the impact would still be “extremely significant.”

While there are short-term winners, such as refineries connected to the Druzhba pipeline, the quest to wean Europe off Russian oil will rock the hydrocarbon industry and global crude markets.

“The competition for the remaining barrels in an already stressed global market will be fierce and there will be very little scope for oil prices to ease,” Thaler said.

How will the embargo affect the oil markets?

Oil prices will rise from elsewhere as European refineries quickly seek alternative supplies.

In May, about 500,000 barrels per day of Russian crude was still arriving in northwest Europe, according to Vortexa, a shipping analytics company. While this is a significant drop of 1.4 million barrels that Vortexa said came every day before the Russian invasion of Ukraine, shipments to Mediterranean countries such as Italy have been up since February 26 – although a portion of those supplies go to Turkey. .

Meanwhile, analysts said Russia, which produced more than 10 percent of global oil supply before the crisis, will need to find new buyers for its barrels – or international oil markets may become seriously short of supplies.

India has already boosted its purchases and China is expected to import more as its major cities emerge from Covid-19 lockdowns. But there are still big question marks about how much Russian oil they can absorb, either because of refineries’ mismatch with Russian grades or a desire to diversify their suppliers.

Millions of barrels of Russian oil are afloat on ships with the ships’ destinations marked as “unknown,” suggesting shipments may struggle to find buyers.

The International Energy Agency has forecast that Russian production could fall by as much as 3 million barrels per day. Some analysts see a smaller decline of 1-1.5 million barrels per day. But even this low number may be enough to push oil prices much higher.

Are there still issues for Member States to overcome?

One of the immediate issues is what to do about the Russian-owned refineries responsible for 10 percent of the block’s capacity. Western funding for these plants, which collectively refine about 1.2 million barrels per day, has dried up due to fear of sanctions, leaving them dependent on receiving crude oil directly from parent companies, including state-backed Rosneft and Lukoil, the sector’s largest privately owned company. The private. Russian oil producer.

Without access to Russian seaborne oil, there is a real risk that these refineries will soon cease to operate, exacerbating the EU’s fuel crisis. Diesel supplies in particular are already scarce, resulting in record pump prices in many countries.

Russia's deep involvement in the oil industry in Europe.  Map showing selected refineries receiving Russian crude via the Druzhba pipeline or seaborne shipments.  Refineries with Russian contributions are distinguished

“Governments will have to step in, perhaps with nationalization, to keep them operating and ensure energy security as well as jobs,” said Simon Tagliabitra, senior fellow at Bruegel, a Brussels think-tank.

The authorities have so far been silent on whether they will act, however, while EU law is silent on property ownership.

Who benefits from the ban?

Refineries in countries such as Hungary, which has access to the Druzhba or “Friendship” pipeline that transports crude from Russia, will be boosted in the short term.

The Urals, Russia’s main export grade, was trading at $95 a barrel on Tuesday – just under $30 cheaper than Brent. With fuels like diesel and gasoline selling at international prices, refineries that can still access Russian oil through pipelines will make remarkable margins.

Hungary’s state-backed MOL, which operates the country’s only refinery, could make more than $2 billion over 12 months from the Urals discount alone at the Danube plant, according to Financial Times calculations.

What will come next?

The deal agreed at the Brussels summit leaves a number of open questions about the details of the new system, which will have to be raised in the coming days and weeks.

Among the most contentious is how to ensure that all member states settle when the temporary shutdown of pipeline shipments closes. Member states will be watching Hungary closely, given Prime Minister Viktor Orban’s combative approach to the ban.

The European Union could consider imposing sanctions on other major exports from Russia – although officials downplay the bloc’s prospects of targeting natural gas in the future.

Those in favor of a gas ban – such as Estonia’s Prime Minister Kaja Kallas – admit they face an uphill battle given the cost that supply cuts would impose on the EU economy. “I think gas should be in package seven,” Klass told reporters in Brussels on Tuesday [of sanctions]but I’m also realistic – I don’t think it would be.”

The European Commission estimated earlier this month that a full cut in gas supplies from Russia this year would limit EU growth by 2.5 percentage points to just 0.2 percent.

Ursula von der Leyen, the commission’s chairwoman, said Tuesday that “the bulk” of energy sanctions are now in place, and that the commission may now need to focus more on filling loopholes and tackling fraud.

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