OPEC warns of global supply shock if EU sanctions Russian oil
OPEC has warned the European Union (EU) sanctions on Russian fossil fuels could create one of the worst global oil supply shocks in history.
Officials from both groups held talks in Vienna, with the EU weighing up a ban on Russian oil following its restrictions on coal imports.
Representatives from the cartel told its EU counterparts it would be impossible to replace those volumes with alternative supplies, and signalled it would not pump more oil beyond its current commitments.
OPEC’s secretary general Mohammad Barkindo fears a potential loss of more than 7m barrels per day of Russian oil from current and future sanctions.
In notes for an upcoming speech seen by news agency Reuters, he said: “”Considering the current demand outlook, it would be nearly impossible to replace a loss in volumes of this magnitude.”
He also argued that highly volatile market was a consequence of “non-fundamental factors” outside OPEC’s control – such as geopolitical tensions and supply chain chaos caused by the pandemic.
EU remains split on oil sanctions
The gloomy forecasts from OPEC follow reports from the International Energy Agency (IEA) three million barrels of Russian oil could be excluded from global markets – causing shortfalls during the second and third quarters of this year.
Brent Crude prices rose to 14-year highs last month – peaking at $139 per barrel – following Russia’s invasion of Ukraine amid multiple rallies driven by fears of supply shortages.
However, pledges from the US and IEA to pump 240m barrels of crude oil to cool prices caused both major benchmarks to drop below the $100 milestone last week.
OPEC’s refusal to ramp up production this week is not a surprise, and with calls from US, UK and the IEA in recent months to boost its production levels also falling on deaf ears.
The organisation and its producer allies such as Russia (OPEC+) are sticking to modest pledges to increase output by around 432,000 barrels per day in May, as part of a gradual unwinding of output cuts made during pandemic.
However, it has persistently failed to reach raised production levels in the past six months, with multiple members failing to hit required quotas.
During the meeting yesterday, EU representatives pointed out OPEC has a responsibility to ensure balanced oil markets.
It also told OPEC the cartel should provide more production from its spare capacity.
The EU expects its oil use to decrease 30 per cent by 2030 from 2015 levels, under its planned policies to fight climate change.
However, the bloc is also considering an immediate ban or phasing down of Kremlin-backed oil imports, in line with its pledge to discontinue Russian coal imports from mid-August.
The European Commission is drafting proposals for an embargo – which has received the backing from countries such as Ireland and Lithuania.
The continent remains split on the proposal – which requires unanimity to be passed – with Germany and Austria triggering emergency gas measures this month to ease fears of shortages.
Can the EU afford to cut off Russian oil supplies?
European think tank Bruegel warned last month the EU would need to reduce demand alongside importing oil from overseas partners to mitigate the effect of losing Russian oil supplies.
It said: “The focus should be on cutting proactively rather than boosting demand. This will calm markets and allow supply and demand to meet at a more reasonable price.”
“EU and other OECD countries should swiftly enact coordinated plans to reduce demand. Analogies with actions taken during the Second World War or the 1973 OPEC oil embargo are not far-fetched. “
Bruegel also argued it would be hard to reroute crude and oil products inside the EU without Russian routes, and that its refineries would be less efficient with oil imports from other countries such as Iran and the UAE.
Instead of a full-on ban, it has called for the EU to impose price caps and taxes on energy imports from Russia.
So far, the bloc has spent €10.6bn on Russian oil since the country invaded Ukraine on February 24.
Ole Hansen, head of commodities at Saxo Bank expects oil to trade at elevated prices regardless of whether the EU ramps up sanctions.
He said: “With the war ongoing and the risk of additional sanctions or actions by Russia the downside risk to crude oil remains, in our view, limited. In our recently published Quarterly Outlook we highlighted the reasons why oil may trade within a $90 to $120 range this quarter and why structural issues, most importantly the continued level of underinvestment, will continue to support prices over the coming years.”
UK has pledged to phase out Russian oil imports by the end of the year, while the US has already banned Russian fossil fuel imports entirely.