Spotlight: Russian oil: Proposed EU sanctions support our forecast for supply disruptions to reach 2.8 million b/d in August

On May 4, the EU proposed a near-complete ban on Russian oil imports by end-2022, while potential sanctions on shipping insurance could make it more difficult to reroute cargoes. The details remain under discussion, but clear EU urgency to wind down 3.6 million b/d of crude and product imports from Russia aligns with our forecast for 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 reported by S&P Global Commodity Insights, the proposal envisions phasing out EU crude imports of 2.3 million b/d (2021 data) within six months, excluding a possible extension for 200,000 b/d to Hungary and Slovakia. Another 1.2 million b/d of refined product imports would cease by end-2022, while 700,000 b/d of total oil exports to the US have already halted and 200,000 b/d to the UK will wind down by the end of the year. Despite these outsized dislocations, the key to determining the level of eventual Russian production shut-ins will remain the volume of cargoes redirected to Asia and elsewhere.

Russia's crude pipeline shipments over 1.5 million b/d heading east were largely maxed out even before the Ukraine invasion, due to infrastructure constraints, but seaborne loadings from the Baltic and Black Sea have proven unexpectedly persistent. As we noted in a May 3 Spotlight, crude flows recovered in April on the back of sharply higher deliveries to India. However, exports should begin to fall by May 15, after which EU sanctions only permit "strictly necessary" transactions with Rosneft, Gazpromneft and Transneft.

The market impact from the EU import ban will hinge on implementation details, but the policy itself is unsurprising. More notable could be sanctions on shipping and insurance reportedly under discussion for implementation by early June, which would increase the difficulty of redirecting cargoes to willing buyers elsewhere. We currently forecast monthly Russian crude production drop-offs of 670,000 b/d in May, 400,000 b/d in June, and 350,000 b/d in each July and August. A slower (or faster) timeline is clearly realistic, depending on future sanctions details as the war in Ukraine continues to evolve.

Please see our April 28 World Oil Market forecast for more details on our Russia assumptions and the resulting impact on global balances.

We estimate Russian crude averaged 9.1 million b/d in April, down 1.0 million b/d from March and nearly 1.1 million b/d below February (the post-April 2020 high). The trajectory of future shut-ins will hinge in large part on the policy response from Western governments to developments in Ukraine. In a relatively surprising shift since the Feb. 24 invasion (when we initially expected minimal production shut-ins), the relevance of EU sanctions has surpassed that of US oil and financial restrictions in determining the overall impact on Russian supply.

Notably, Europe appears determined to proceed with an explicit oil import ban despite the US Treasury secretary advocating a more measured policy measure. This dynamic likely indicates that European sanctions will tighten further if war conditions continue to deteriorate and a peace deal remains elusive. Following any near-term agreement on oil import sanctions, the next shoe to drop comes from a May 16 EU ban on transactions with Rosneft, Gazpromneft and Transneft that are not "strictly necessary." Legal ambiguity persists over which oil purchases will be permitted, but recent commentary from trading companies points to a notable fall in seaborne exports from the second half of May.

By Paul Sheldon, Nareeka Ahir