Russian Oil Trade in Limbo, Threatening Global Supply

Russian Oil Trade in Limbo, Threatening Global Supply

March 2, 2022

Despite Western efforts to keep the energy sector out of sanctions on Russia, the country’s oil trade faces significant disruptions as importers—including the US—put orders on hold and search for alternative sources. This situation poses a potential threat to the global energy supply.

Russia’s Role in Global Oil Trade

Russia is the world’s second-largest crude oil exporter, shipping approximately 5 million barrels per day (bpd), which represents about 12% of global oil trade, according to the International Energy Agency. This significant supply has become increasingly uncertain due to the ongoing geopolitical situation.

Dependence on Russian Oil

Russia is a key supplier to many regions, notably the European Union, which relies on Russia for nearly 40% of its natural gas and over 25% of its crude oil. Despite sanctions targeting other sectors, Western leaders have thus far refrained from imposing sanctions on Russian oil to avoid disrupting global energy markets.

The United States, the world’s largest crude exporter, also imports Russian oil to supply its refineries when domestic reserves are low. In 2021, the US imported around 245 million barrels of Russian oil, contributing to approximately USD 17.4 billion in revenue for Russia. However, due to growing pressure to target Russia’s oil industry, which constitutes a major portion of its GDP, the US, along with 30 other countries, agreed to release 60 million barrels from strategic reserves to stabilize global oil markets, with the US contributing 30 million barrels.

US Energy Secretary Jennifer Granholm also emphasized the need to invest in clean energy to reduce dependence on Russian oil and gas, both domestically and globally.

Rejection of Russian Oil

Amid escalating international condemnation of Russia’s actions, US traders have begun rejecting Russian oil shipments. Traders have warned that there won’t be much Russian oil traded after the invasion, as no one wants to be seen purchasing Russian oil, especially with the current global sentiment against the Kremlin.

Big Oil Companies Take Action

Major oil companies have started distancing themselves from Russia. ExxonMobil announced plans to cease operations in Russia, ending partnerships with companies from Japan, India, and Russia. Similarly, Shell revealed plans to exit its joint ventures with Russia’s Gazprom. BP also made headlines by announcing it would sell its nearly 20% stake in Rosneft, a Russian state-controlled oil company.

Impact on Oil Prices

The aversion to Russian oil has caused a sharp discount to its Urals grade oil, with Trafigura Group offering a cargo at USD 18.60 below benchmark prices. Meanwhile, Brent oil prices surged over 9% to surpass USD 114 per barrel, exceeding previous predictions that the Russia-Ukraine crisis would push oil prices to around USD 110 per barrel.

This rejection of Russian oil could have long-term consequences for global supply and pricing, as the world grapples with the fallout from the geopolitical crisis.