07/06/2022
Russia’s oil export revenue has increased by 50% this year.

  • Russian oil producers have to rely on a shrinking list of buyers to sell their production.
  • Lockdowns in China have slashed demand for crude as the European Union seeks to ban imports of Russian oil.
  • An industry expert laid out three potential options that Russia should have for dealing with the situation.

Russia may be reaping billions in oil revenue thanks to higher crude prices, as a direct result of Western sanctions, but its list of potential clients is shrinking and its hopes are increasingly pinned on the leading importer of essential commodities.

The US is imposing a complete ban on Russian energy imports, while the UK will phase out its purchases of Russian fuel. The European Union has banned imports of Russian coal, but is still trying to persuade all member states to impose a ban on crude and refined products in the country.

The European Union was Russia’s largest crude oil customer, producing about 3 million barrels per day out of its 7 million barrels per day exports. But even before talking about the import ban, traders avoided Russian oil.

Countries like India and China have stepped in to seize Russian oil at bargain prices, but in much smaller quantities. India, for example, has bought at least 40 million barrels of Russian crude since the invasion of Ukraine, exceeding the amount it bought in 2021. However, this still equates to about 450,000 barrels per day.

China was also usually a big customer. The country’s independent oil refineries were quietly buying cheap crude oil. But while China has been consuming large amounts of Russian oil lately, its appetite is not insatiable. Its traders already import 1 million barrels of Russian crude oil from the sea. The country is still facing a series of strict coronavirus lockdowns that have affected its energy needs.

Even if demand from China fully recovers, the two countries that will absorb Russian oil – India and China – will not make up for the loss of EU demand, Fernando Ferreira, a geopolitical risk analyst at Rapidan Energy Group, told Insider.

“China and India will not save them alone,” he said.

Looking for new buyers

The short-term solution for Russia will be the search for new markets. “They will try to find new buyers,” Ferreira said. “They have moved a lot of their customer base from Europe to Asia and have so far been able to offset any disruption by selling more to India and China.”

But he said many Middle Eastern exporters produce crude grades similar to Russia’s Ural grades and have the advantage of being the first mover.

India, for example, has long-term trade agreements and commercial and strategic relationships with the Gulf countries that it would like to maintain. “It will limit the amount of oil they are going to take from Russia,” Ferreira said.

He added that the restrictions on shipping will hamper Russia’s ability to ship more oil to Asia, as more ship owners and insurers avoid dealing with Russian oil due to tighter EU restrictions.

Cut or save the output

Another viable option for Russia is to cut production or build more deposits.

Russia already started cutting crude oil production last month due to lower domestic demand.

The Kremlin said production would fall by as much as 17% this year from about 11 million barrels per day.

“Some of them [demand] He could recover a bit this month. “We see refiners trying to make up for the drop in production, but in the long run there aren’t many sustainable solutions other than finding new buyers and they will struggle with that,” Ferreira said.

“The best case scenario is for India, China and other countries to really stand up and absorb all the destroyed Russian barrels,” he said.

He added that this would be a delay rather than a disruption.

“I think the worst case scenario would be something like a recovery in Chinese demand and at the same time there is increasing pressure on imports from Russia,” Ferreira said.

The Russian government said in April it was considering building facilities to store 700 million barrels of oil — the equivalent of about 70 days of global consumption, Reuters reported.

Ferreira said oil prices “could be very close to the top already.” But he said there was still a possibility of a shortfall of 2 million barrels of oil per day if Russia could not find new customers.

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