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There is growing pressure on the EU to block the flow of Russian crude – a key foreign exchange earner for the Kremlin and an easier source of energy for the EU to reject than natural gas.
“It is inevitable that we start talking about the energy sector, and we can certainly talk about oil because it is the main source of income for the Russian budget,” Lithuanian Foreign Minister Gabrielius Landsbergis said on Monday. upon his arrival at a meeting of EU foreign ministers in Brussels.
It’s an idea backed by a growing number of other EU countries as the bloc considers a fifth round of sanctions against Russia for its invasion of Ukraine.
“We will continue to discuss what kind of sanctions we can think about again, especially related to energy,” EU foreign policy chief Josep Borrell said. The subject will be discussed when European leaders meet later this week in a joint summit with US President Joe Biden – who has already declared an embargo on all Russian energy imports.
This leads to nervous noises from Moscow.
“As far as we know, they are actively discussing the imposition of an embargo on the supply of [Russian] oil,” Kremlin spokesman Dmitry Peskov said on Monday, adding that any such measure would mean Europeans “will have a hard time.”
Deputy Prime Minister Alexander Novak told the Russian Duma that given the West’s preparations for a ban on the purchase of Russian oil, it is increasingly urgent for Russia to increase shipments to the ‘Asia.
The problem for Moscow is that it is much more vulnerable to a crude cut than natural gas sanctions.
The EU gets around a quarter of its gas from Russia – most of it being shipped via pipelines, making it difficult to replace it quickly.
But gross is another story. Although the EU gets around a third of its oil from Russia, only 4-8% comes from pipelines, meaning it can be more easily replaced by buying oil from international markets. It is also a much more painful blow for Russia because it earns much more by selling oil than gas.
Reliance on Russian crude varies widely; France gets around 13% of its oil from Russia, Germany around a third, while Poland and Finland get two-thirds and Slovakia three-quarters, according to an analysis by Transport & Environment, an NGO.
“The key is to cut off funding from the Russian war machine. The sanctions imposed by the West so far have not affected Russia’s attitude in any way,” said Piotr Arak, director of the Polish Economic Institute.
The invasion of Ukraine is already making Russian oil a pariah commodity; Russia’s flagship Urals crude is now trading near $30 against the global oil benchmark and is struggling to find buyers, although there has been an increase in sales in markets like India and China.
“Russian maritime crude oil exports in March increased compared to last month,” noted Petro-Logistics, an analytics company that tracks tankers, adds: “There are cargoes awaiting destination as a result of Western sanctions against Moscow.”
The International Energy Agency warns that Moscow could respond to sanctions pressure by cutting production – although this would also turn off the cash tap of around 250 million euros a day flowing from the EU to Russia – which, according to Ukraine, is helping to finance the war.
From next month, Russia could cut its oil production by up to 3 million barrels a day, the IEA warned on Friday – about a third of its crude exports.
“With the potential loss of large amounts of Russian supplies looming, there is a real risk that markets will tighten further and oil prices will rise significantly in the coming months as the world enters the season. demand peak of July and August,” the IEA report said on Friday.
“Losses could increase if restrictions or public condemnation escalate,” the IEA added in a separate analysis of the oil market.
It’s already happening: Over the weekend, the world’s three largest oilfield service providers began cutting ties with Russia and without them, Russia will struggle to maintain volumes.
Friday’s IEA report includes a list of 10 recommendations – including reducing speed limits, favoring trains over planes and incentivizing work from home – to reduce oil demand and win time for governments to find replacements in other oil-producing countries.
Taken together, they could save the equivalent of 2.7 million barrels of oil by summer if fully implemented by the IEA’s 31 members, most of which are EU countries. EU. The agency will bring together energy and climate ministers from around the world on Wednesday and Thursday to coordinate their response.
IEA members have already agreed to release 63 million barrels of emergency oil stocks to the market “to send a unified and strong message to global oil markets that there will be no shortage of supply. following Russia’s invasion of Ukraine”.
But this is only a temporary buffer – and oil stocks in OECD countries are at an eight-year low, the IEA has warned. The EU requires countries to keep 90 days of petroleum products on hand, so there’s still time to plan.
Since the start of the invasion of Ukraine, analysts have been looking for alternative sources of oil to replace the Urals crude that European refineries are supposed to process. The Ural is a “medium acid” crude, with a presence of sulfur which makes its refining more difficult and expensive.
Many solutions involve turning to regimes whose human rights record is as splattered as Russia’s.
Alain Mathuren, communications director at FuelsEurope, the association of European oil refiners, said Arabian light crude from Saudi Arabia is often a go-to Ural substitute when available – although many refineries EU can quickly adapt to handle other types.
But while “Saudi Arabia and the [United Arab Emirates] hold substantial spare capacity that could immediately help offset a Russian shortfall,” the IEA said in its monthly market report, the pair “so far shows no willingness to dip into its reserves.”
If the United States lifts its embargo on Iran, it has “approximately 60 million barrels in floating storage that could come to market immediately pending a sanctions agreement.” noted Andy Critchlow of S&P Global Commodity Insights.
As a bonus, Critchlow added, “Iranian light crude is practically a one-size-fits-all swap for Russian Urals.”
US oil giant Chevron is seeking permission to increase production in Venezuela if US authorities lift a ban in place since 2019.
But overall, the world’s major producers are hesitant to step up.
At a March 2 meeting of OPEC and its oil-producing allies – including Russia – participants agreed to a modest overall increase of 400,000 barrels per day in April, but denied the existence of any a global supply shortage.
IEA Director Fatih Birol called the assessment disappointing.
“I really hope that at the next meeting on March 31, they will present messages to help relieve the pressure on the oil markets,” Birol said.
Jacopo Barigazzi and Zosia Wanat contributed reporting.
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