Rystad Energy has revealed that India has increased the import of Russian oil by 8 lakh barrels per day between February and April this year, prompted by the growing Urals discount offered by Moscow. The agency estimates that in the event of further discounts offered by Russia, the volume could go up perhaps to a total of 1 million bpd to 2 million bpd.

Over the past two months buyers from all geographies have demonstrated that political correctness can be offset by steep and heavily discounted oil from Russia, leading to assumptions that some countries and refineries will cheat and continue to source Urals, especially if the discount widens further as the barrels are officially deemed untouchable by EU law.

There are, however, significant infrastructure limitations for this shift, with only two pipelines, including a transit link via Kazakhstan, offering a spare capacity of only 300,000 bpd.Of course, there is a serious challenge as more cargoes would be moved by the sea, which means higher insurance costs, risk of sanctions and in some cases seizures.

The agency believes that repercussions of the Russian oil embargo currently being mulled over by the EU would lead to wide-ranging consequences, pushing oil prices higher in the short to medium term. As the sanctions are negotiated, crude prices will stay elevated as war-related uncertainty persists and summer demand kicks in over the coming weeks.

The EU is getting very close to enacting its proposed ban on Russian oil imports, including sanctions on shipping and insurance. Since unanimity is required within the EU and given the current stance of Hungary in particular, a compromise version of a proposal by the President of the European Commission made on 4 May is currently being re-negotiated 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 land-locked countries of Hungary, Slovakia and Czech Republic. The deal on the table apparently involves a six-month phase-out period for crude imports, and eight months for petroleum products, including the crucial supply of around 1 million bpd of Russian diesel/gasoil to the EU market.

If enacted into law, Rystad believes that most EU members would likely abide by the ban, but reduce their crude purchases at slightly differing speeds, while the near 300,000 bpd of Druzhba crude imports into the three land-locked countries would continue as it is at least for the initial six to eight months of the phase-out period.

According to analysts, the EU potentially displacing between 2 million bpd and 3.4 million bpd should be a bullish signal for short-term pricing for the replacement barrel market, such as Brent and WTI. They also expect discounts on Urals to further widen to attract more buying from India and China. Given that not all barrels can be directly swapped, with potential shipping and insurance sanctions as part of the EU embargo plan further affecting movement, Russian upstream operations will take a severe hit, possibly close to the scale of the April 2020 Covid-19 induced shut-ins.

Russia has said its breakeven price for selling Urals is around $45 per barrel, so the government will likely opt for steep discounts to ensure a flow of budget revenues before enacting costly well shut ins.

The seasonally high consumption months of June, July, and August will increase demand materially as the travel season pushes up demand for road and jet fuel, and as the amount of oil burned in the Middle East over the summer period for cooling purposes increases. Projections of global refinery runs see an increase by at least 4 million bpd between now and the peak July intake.

The expected seasonal increase, as well as the strength in momentum for an EU embargo, has led analysts to maintain an expectation that oil prices will remain supported towards the third quarter of this year. The market had not fully priced in the EU oil embargo news, which adds to the tightness in the crude market for non-Russian grades such as Brent and WTI. But much will depend on the extent of the unprecedented shift in global crude trade flows this may cause in the months ahead. (IPA Service)