As European leaders are being confronted with news about the events in Ukraine, pressure is mounting to extend economic sanctions to energy. A ban on Russian coal has already been approved, but core oil and gas flows remain unsanctioned in the European Union, although calls for an oil embargo sound louder by the day, and the European Commission is now proposing to end all Russian oil purchases by the end of 2022. This Insight explores whether, how, and when a ban on Russian oil and refined products could be introduced.*

• Even with a significant degree of self-sanctioning, shipping data continue to show about 1.6 MMb/d of waterborne Russian crude oil and 0.65 MMb/d of diesel landing on Europe's shores, while pipeline deliveries through the Druzhba system remain around 0.8 MMb/d.
• Adjusted for rationalized capacity and upcoming turnaround maintenance, spare capacity across Europe proves to be limited, making a short-fused ban on crude oil and refined products highly unlikely.
• A potential return of Iran to the global crude oil market, the start-up of grassroots refining capacity in the Middle East, a further increase in OPEC production, and the availability of West African and Middle Eastern barrels shunned by India and China in favor of discounted Russian crude oil could all contribute to a market where replacing Russian oil is no longer considered a mission impossible.
• Additionally, a potentially prolonged downturn in China and willingness in import markets across Africa and Latin America to import more Russian product may render the decision easier to take, albeit uncertain.
• Most of these supply-side factors are highly uncertain, and should they fail to materialize, they would dramatically affect balances and ultimately prices, especially with Chinese demand peaking in autumn.
• As the European Union's goal is to reduce the eye-watering contributions to the Russian treasury, an alternative solution is to impose significantly higher import duties on Russian crude oil and refined products, such that product netbacks fall significantly.
• It is likely that any headline-grabbing oil embargo would morph into a roadmap for a gradual phaseout, differentiating between crude oil and refined products, between seaborne and pipeline flows, and potentially even between importers and their unique situation, while leveraging robust emergency reserves.

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*See Andrew Gray, "Brussels proposes EU ban on Russian oil imports", Politico, 4 May 2022, Retrieved 4 May 2022. https://www.politico.eu/article/brussels-proposes-eu-ban-on-russian-oil-imports/

Posted 10 May 2022 by Hédi Grati, Executive Director, Petrochemical Feedstocks, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.