A near-total embargo on Russian crude imports into the European Union is finally affecting Russia’s oil revenue. Concerns that it might deliver a windfall to the Kremlin to bankroll its war in Ukraine have been alleviated – for the time being.
The US administration was concerned that EU sanctions on Russian seaborne crude, which went into effect on Monday, would cause prices to skyrocket. A significant source of concern was a prohibition on the provision of ships and services such as insurance and finance for Russian commodities traveling anywhere in the globe.
The US recommended a price cap on Russian exports to lessen the damage. Cargoes purchased at prices lower than the cap, which would eventually be set at $60 per barrel, would be excluded from the shipping and services restriction.
But it appears that they did not need to be concerned, at least not yet. The last Russian barrels have been delivered to European ports. Moscow has lost a market worth more than 1.5 million barrels per day right on its doorstep. If Poland and Germany follow through on pledges to restrict pipeline imports, it stands to lose another 500,000 barrels per day by the end of the year.
Nonetheless, rather than rising, oil prices have fallen. On Friday, the fifth day of the import embargo, benchmark Brent crude was trading below $77 per barrel, momentarily falling below $76. This is a drop of more than 14% from the highs reached on Monday after the penalties were imposed.
Russia’s crude oil export prices have dropped even lower. Its important Urals export grade was trading for slightly more than $40 per barrel in the country’s Baltic ports, which remain the country’s main outlet for petroleum. That is close to the breakeven point for production and well below the $60 per barrel price cap imposed alongside the EU import embargo.
The persistent importance of Russia’s Baltic ports, even after the country has lost its European market, demonstrates the government’s inability to divert oil flows. The single pipeline to China and Russia’s Pacific coast export terminal at Kozmino is already full, and the only route to reach Russia’s last remaining markets in China, India, and Turkey is via long voyages around Europe and through the Suez Canal.
Instead of causing a crude shortfall, the EU sanctions have created localized gluts in certain markets. A massive amount of Russian oil is competing with flows from conventional Middle Eastern sources, and sellers must offer steep discounts to compensate for the high expense of the lengthy travels required to transfer cargo from the Baltic.
Meanwhile, Europe is not in a rush for crude. Russia’s invasion of Ukraine, which has fueled inflation, notably for food and energy, has weakened European economies to the point that, as I said in early November, the globe can easily cope with the loss of Russian barrels, at least for the time being.
That could change in the next few months. China is loosening its Covid limitations, which might spark fuel demand that has been stifled by travel restrictions and a slump in economic activity. This will cause the market to tighten once more.
A potentially more severe EU ban on Russian refined oil products like diesel is also on the way. This could destabilize oil markets, which are already running low on transportation fuel.
Meanwhile, in response to the price cap on his crude, Russian President Vladimir Putin has threatened to cut production. If he cannot sell his oil profitably, he may find that the oil business makes the decision for him.
The Kremlin is already expecting a significant drop in earnings from crude export duties beginning next month. Based on crude prices since the middle of last month, Russia’s per-barrel fee could fall to its lowest level in January since the Covid-19 outbreak cut earnings in early 2020.