The biggest reshuffling of oil flows since the 1970s

The biggest reshuffle in oil trade flows since the Arab oil embargo of the 1970s is underway – and things may never return to normal. The Russian Invasion of Ukraine and Sanctions on Russian Oil Exports alter global oil trade routes. Over the past five decades, oil has flowed more or less freely from any supplier to any customer in the world, with the exception of sanctions against Iran and Venezuela in recent years.

This free energy trade is now over, after Russian aggression and the Western sanctions that followed, as well as Europe’s irreversible decision to cut its dependence on Russian energy at all costs.

A New Cold War in the Oil Market

A new Iron Curtain is now disrupting oil flows as Europe turns to the United States, the Middle East and Africa (and essentially everyone other than Russia) for oil supplies . The EU last week adopted a penalty package stop importing Russian maritime crude oil within six months and Russian petroleum products within eight months.

In a much more ambitious measure of the sanctions package, the EU is also banning EU operators from insuring and financing the shipment of Russian oil to third countries after a six-month liquidation period.

The UK is also set to join the insurance ban after the UK and EU reportedly agreed jointly close Russia’s access to oil cargo insurance. The UK is home to a club of insurers that covers 95% of the global oil transport insurance market.

The move is expected to make shipments of Russian oil to countries eager to take its oil, primarily in Asia, more difficult to arrange in terms of liability coverage, and could prompt buyers in India and China to seek even deeper discounts. on Russian crude for Daté Brent. The flagship quality of the Urals in Russia is sold at a price over $30 off in Brent these days.

Changing Trade Routes

By the end of this year, Europe expects to have effectively banned 90% of all its pre-war Russian oil imports. The embargo and self-sanction are already disrupting global tanker traffic. Instead of traveling two or three weeks from Russian Baltic ports to Hamburg or Rotterdam, tankers carrying Russian oil now travel two or three months to reach India and China.

For oil destined for Europe, crude from the Middle East will now travel longer distances to European ports compared to shorter routes to India and China.

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These changes in oil flows will drive up the costs of insurance, shipping and cargo financing, said Zoltan Pozsar, global head of short-term interest rate strategy at Credit Suisse and former head of the department. of the US Treasury. The Wall Street Journal. More expensive energy trading – due to the end of free trade which was based solely on market signals of supply, demand and prices – could put commodities at the center of the next crisis global economy, Pozsar told the Journal.

Winners and losers

True, Russia is increasingly using ship to ship transfers to load crude from small tankers onto supertankers. It is also expected to divert some of its crude shipments as Iran has done since US sanctions on its oil exports were reimposed in 2018. Still, Asia will not be able to absorb all the Russian oil that previously went to Europe, which was Russia’s largest oil customer before the war.

India, which traditionally buys oil mainly from the Middle East, is boosting Russian oil purchases, taking advantage of cheap Russian crude. Middle Eastern producers, for their part, are expected to supply more oil to Europe, as are African producers and the United States.

India and China are the chance for Russia to continue selling its oil. Although Russia publicly expresses confidence that it will have “new markets” for its energy, analysts doubt that all the oil that would have gone to Europe could end up with buyers in Asia, also due to problems. liability coverage and changing oil trade routes that extend the period that crude travels from seller to refiner.

For Europe, the choice of oil supply is now political, and it will be ready to pay a premium to obtain non-Russian oil. This will tighten supply options and continue to support high oil prices for months to come.

Commenting on the EU embargo on Russian oil imports by sea, Fitch Ratings said Last week:

“This ban will have a significant impact on global oil trade flows, with around 30% of EU imports set to be replaced by other regions, including the Middle East (Saudi Arabia and the United Arab Emirates maintained spare capacity of approximately 2 MMbpd and 1 MMbpd, respectively), Africa and the United States.

“However, we believe that redirection of all Russian oil and product volumes may not be possible due to infrastructural limitations, buyer self-restrictions and logistical complications, such as potential restrictions on the supply of insurance for shipments carrying Russian oil.As a result, we estimate that around 2MMbpd to 3MMbpd of Russia’s oil exports, or about a quarter of the country’s oil production, could disappear from the world market by the end of the year. end of 2022,” Fitch noted.

In this new world order of oil trade flows, there are two key issues that the market and policymakers in the US and Europe will be considering in the near term. It is about whether the world has enough spare capacity to replace Russian imports from the EU and to what extent the holders of spare capacity – Saudi Arabia and the United Arab Emirates – will be ready to exploit this capacity. . According to the OPEC+ deal, Saudi Arabia’s production target for July is 10.833 million bpdbut the Kingdom very rarely tested sustained production of 11 million bpd despite claiming a capacity of 12 million bpd.

By Tsvetana Paraskova for Oilprice.com

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