As war rages in Ukraine—including a Russian bombing raid within 20 km of a NATO member's border—the key question for the oil market is whether Russian oil export volumes fall or are redirected elsewhere, especially in April and May when flows will reflect deals made after the Russian invasion. Before the invasion, Russian oil exports were about 7.5 MMb/d—roughly 4-5 MMb/d of crude oil and 2-3 MMb/d of products. Our Commodities at Sea data indicates that loadings and unloading of the Russian crude oil and products are down from pre-invasion levels. Severe discounts for Russia's Urals crude oil prices, $29/bbl below Dated Brent compared with typical discounts of $2-4/bbl, indicate great difficulty selling Russian oil since the invasion. At the same time, mainland China has just imposed its most severe regional restrictions on movements since the 2020 COVID-19 outbreak—contributing to stunning volatility and a sharp price drop.

When it comes to Russian exports, there is a wide range of potential outcomes—from 0.0 MMb/d to 7.5 MMb/d of disrupted exports, although the maximum is probably closer to 6 MMb/d. How much Russian oil could be replaced? The answer depends on the volume disrupted, how long it remains out, and how it is replaced. An extreme loss of 6 MMb/d could be replaced at least for a time, but not easily and not for long. Think of it this way. If Russian oil exports fall 3 MMb/d from April to December 2022, it would be a loss of 825 MMbbl—well above the 575 MMbbl currently held in the already shrinking US Strategic Petroleum Reserve (SPR). Saudi Arabia and the United Arab Emirates (UAE) would also have to raise output to prevent unhinged oil prices. Yet, Saudi Arabia has yet to signal it will increase production unilaterally, as that could endanger its relationship with Russia and the future of OPEC+. A sustained loss of exports will lower Russian crude oil production by a similar amount. Russia has relatively little storage capacity—around 180 MMbbl, much of which is already used. If exports drop by 3 MMb/d, storage would quickly fill and output would fall.

We are at the beginning of a global commodity shock—prices for oil, gas, wheat, nickel, iron ore, and aluminum are high and could go higher. This will have a negative impact on the global economy, supply chains, and oil demand. We lowered 2022 world oil demand from 101.5 MMb/d to 100.0 MMb/d. The recent surge in COVID-19 cases in mainland China is another worry as it could lower oil demand—and prices—even more and snarl supply chains.

Most of Russia's preinvasion oil sales were to NATO members. That will change—and it began on 8 March when the United States banned the import of Russian oil. In Europe, the transition away from Russia will take longer. New buyers will emerge and existing buyers in Asia will try to buy more Russian oil, especially if deep discounts endure. The oil market will adjust, but it will be a partitioned market.

"We are experiencing a turning point. And that means the world after is no longer the same as the world before." This was what German Chancellor Olaf Scholz said during his historic speech on 27 February that upended decades of German foreign and economic policy. He could have said the same about the world oil market. We are not going back to the way things were. The coming together of markets around the world that began in the 1990s is now coming apart.

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Posted 22 March 2022 by Jim Burkhard, Vice President & Head of research for oil markets, energy & mobility, 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.