Posted on August 29, 2022
Consultancy Rystad Energy expects a drop-off ahead for Russian oil production and exports as the cutoff date for the planned EU oil embargo approaches. At the end of this year, the European Union will not allow further imports of Russian crude, depriving western Russia of access to its primary export market.
Over the span of the summer, Russia’s oil sector has been buoyed by high domestic demand, even as exports to Europe have fallen. Russian tourists are staying nearer to home due to the withdrawal of foreign airlines, and they are driving to their vacation destinations – thereby consuming more gasoline and creating demand for higher refining runs. This has helped offset the drop in demand from traditional European customers.
However, there are signs that the picture may not be so pleasant for Russia’s energy sector going forward. Rystad notes that crude exports shrank in June and July – including exports to buyers in Asia, who have been absorbing oil that would ordinarily be sold into European markets. The reason for Asian buyers’ declining interest is not known, but Rystad suggests that it could be that Russia has reduced the discount against Brent it is offering to its customers. These sales are private and undisclosed, but the pricing may have shifted from the previously-reported $30 per barrel discount to a more modest $15.
Whatever the cause, declining interest from Asia and the cutoff in Europe could reduce Russian crude exports by about 550,000 barrels a day by the end of December.
“Russia’s upstream sector has rebounded but this resilience is short term. Domestic consumption has helped fill the gap during the peak demand season, but overseas demand for Russian blends has dipped spelling trouble further ahead. The upcoming EU embargo remains an unknown factor, when and where it will impact is not yet clear, but it will hasten the decline expected this autumn,” said Daria Melnik, senior analyst at Rystad Energy, in a new researech note.
An impending economic downturn will likely add to the impact domestically. Russia’s own central bank predicts a severe economic contraction of about 10 percent in the fourth quarter. The resulting reduction in demand for energy will weigh on domestic refining runs, taking another 700,000 bpd bite out of domestic oil consumption, according to Rystad.
“Russia will have to cope with a national economic crisis as well as source new markets for its oil and oil products when the EU embargo comes into force. After the summer ramp-up, crude production is expected to fall again by 1.1 million bpd, but further recovery will be more challenging and will take more time,” predicted Rystad.