Crude supply cuts from Russian sanctions just a 'drop in the ocean:' Vitol's Muller

Western economic and financial sanctions on Russia have reduced its crude supply by an estimated 1 million b/d, a "relative drop in the ocean compared to the intended impact," the head of Vitol Asia said on May 8.

"If only one million b/d has gone missing so far, before the EU shuts the door on Russia crude if they indeed succeed in getting unanimity over there, that's indeed not the intended consequence of sanctions," Mike Muller told the Gulf Intelligence daily energy markets podcast.

Russia is struggling to keep all of its oil wells running as the West targets Russia's oil following the invasion of Ukraine, with crude output slumping by almost 1 million b/d in April to more than an 11-year low, several industry sources and analysts told S&P Global Commodity Insights on May 6.

More production declines are likely in the coming months even as Moscow looks to divert some of its barrels to its Asian customers and the EU steps up its sanctions against Russian oil and mulls a bloc-wide ban on Russian crude imports by year-end.

On May 4, the EU said it planned to phase out imports of Russian oil into the trade bloc by year-end, but it sparked a pushback from some EU members like Hungary and Slovakia, which are very dependent on Russia's crude.

Arbitrage barrels

Buyers are taking Russian crude and oil products despite the proposed EU blanket ban on Russian oil imports, which if fully implemented, would take a heavy toll on Russian oil exports. The EU was importing about 2.3 million b/d of Russian crude and 1.2 million b/d of its oil products before the war which started on Feb. 24.

S&P Global expects Russian production shut-ins to grow from 1.1 million b/d in April, to peak disruptions of 2.8 million b/d in August, as a result of tighter EU sanctions.

Russia is a significant supplier of oil to the world, exporting more than 7 million b/d of crude and petroleum products, or some 13% of the total oil trade.

However, self-sanctioning by some European refiners and independent traders has already slashed seaborne flows of Russia's Urals crude, heavy fuel oil, vacuum gasoil and naphtha into the region.

Despite the output fall, Russian exports rose in April as seaborne loadings from the Baltic and Black Sea were unexpectedly persistent, with demand from China and India for these barrels soaring.

In April, India's imports of Russian crude ballooned to almost 900,000 b/d, according to shipping analytics provider Kpler, from less than 40,000 b/d in February.

"For now, Indian refiners do seem to have the go ahead from Delhi to continue buying arbitrage barrels," Muller said.

Alarming spare capacity

The shunning of Russian oil by European refiners has pushed prices of Russian crudes such as Urals to record lows.

The price of Russian Urals CIF Rotterdam averaged $69.89/b in April, according to S&P Global data. This compares with a monthly average of $104.40/b for the UK's Forties, which is similar in quality to Urals.

The oil supply cuts from Russia are taking place at a time when OPEC's spare capacity is dwindling and Strategic Petroleum Reserve levels are declining, Muller said.

"Unless we see massive demand destruction...the spare supply demand cushion from OPEC will be at a point which is alarming, and it goes hand in hand then with a lower amount of strategic reserves in the SPR-holding countries."

Only Saudi Arabia and the UAE, who are keen to keep Russia within the OPEC+ fold despite a global outcry over its invasion of Ukraine, hold any significant spare production capacity, which most analysts say is insufficient to fully account for expected Russian output declines.

S&P Global forecasts that by July, OPEC+ spare capacity will be down to 1.6 million b/d.

Meanwhile, the US Department of Energy plans to buy back 60 million barrels of crude for the Strategic Petroleum Reserve—or one-third of the massive drawdown that just started flowing—at lower prices, likely in the second half of 2023.

In outlining the plan to refill the emergency oil stockpile based on a future delivery window, DOE said it was aiming to encourage US drillers to boost activity now and "lower prices this year by guaranteeing this demand in the future at a time when market participants anticipate crude oil prices to be significantly lower than they are today."

Crude oil from the largest drawdown in SPR history started hitting the market in May and will continue flowing through October.