By K Raveendran
The seismic upheaval in the global crude oil market has begun to be felt. This is expected to manifest itself in tight crude markets as well as unprecedented shifts in trade flows, including Russian oil from Europe to Asia. Russia should redirect as much volume as possible to alternative markets and India, along with China, would be key players in this change.
Rystad Energy revealed that India increased its imports of Russian oil by 8 lakh barrels per day between February and April this year, due to the growing Urals discount offered by Moscow. The agency estimates that in the event of additional discounts offered by Russia, the volume could rise to perhaps a total of 1 to 2 million bpd.
Over the past two months, buyers in all geographies have demonstrated that political correctness can be outweighed by heavily discounted and heavily discounted Russian oil, suggesting that some countries and refineries will cheat and continue to source Russian oil. Urals, especially if the discount widens further as the barrels are officially considered untouchable by European law.
There are, however, significant infrastructure limitations for this change, with just two pipelines, including a transit link through Kazakhstan, providing spare capacity of just 300,000 bpd. Of course, there is a serious challenge as more cargo would be moved by sea, which means higher insurance costs, risk of penalties and in some cases seizures.
The agency believes that the repercussions of the Russian oil embargo currently being considered by the EU would have far-reaching consequences, driving up oil prices in the short to medium term. As sanctions are negotiated, crude prices will remain elevated as war-related uncertainty persists and summer demand kicks in over the next few weeks.
The EU is about to enact its plan to ban Russian oil imports, including sanctions on shipping and insurance. Unanimity being required within the EU and given the current position of Hungary in particular, a compromise version of a proposal from the President of the European Commission made on May 4 is currently being renegotiated in Brussels. But what seems to emerge from all these deliberations is that the EU will act and impose an oil embargo, with certain exemptions made for the landlocked countries of Hungary, Slovakia and the Czech Republic. The deal on the table apparently involves a phase-out period of six months for imports of crude and eight months for petroleum products, including the crucial supply of around 1 million bpd of Russian diesel/gasoil on the EU market.
If the law were enacted, Rystad believes that most EU members would likely abide by the ban, but reduce their crude purchases at slightly different rates, while the nearly 300,000 bpd of crude imports from Druzhba in the three landlocked countries would continue. at least for the first six to eight months of the elimination period.
According to analysts, the EU’s potential move between 2 million bpd and 3.4 million bpd should be a bullish signal for prices in the short term for the replacement barrel market, such as Brent and WTI. They also expect the Urals discounts to expand further to attract more purchases from India and China. As not all barrels can be directly traded, with potential shipping and insurance penalties under the EU embargo plan further affecting movements, Russian upstream operations will take a hit. hard, perhaps close to the magnitude of the Covid-19-induced shutdown in April 2020. -ins.
Russia has said its breakeven price for the sale of the Urals is around $45 a barrel, so the government will likely opt for deep discounts to ensure a flow of fiscal revenue before putting in place measures. costly closures.
The seasonally high consumption months of June, July and August will significantly increase demand as the travel season increases demand for road and aviation fuel, and as the amount of oil burned in the Middle East during the period summer for cooling purposes increases. Projections of global refining cycles call for an increase of at least 4 million bpd by July’s peak consumption.
The expected seasonal increase, along with the strength of the momentum for an EU embargo, has led analysts to maintain the expectation that oil prices will remain supported towards the third quarter of this year. The market had not fully priced in news of the EU oil embargo, adding to the tightness of the crude market for non-Russian grades such as Brent and WTI. But much will depend on the scale of the unprecedented change in global crude trade flows that this could cause in the months ahead. (API Service)
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