What will be the price if the supply of Russian oil to Western markets is stopped?

US President Joe Biden may be prepared for Europe not to join his embargo on Russian oil imports. But Shell's decision to pledge not to buy more Russian oil and gradually cut it off from its supply chains in the coming weeks serves as a reminder that even if countries have not yet officially banned imports from Russia, buying, paying and securing funding for oil trade with the Federation is already proving a challenge in many jurisdictions. Following the example of the United States on Tuesday, the UK government estimated that 70 percent of Russian oil is struggling to find a buyer for the commodity.

So it's no surprise that analysts are struggling to try to determine the cost of the impact of the recovery in global crude oil supplies, where Russian volumes are virtually frozen in the Atlantic or, more importantly, a financial problem - they can’t find a home anywhere.

And rising seems to be the right word. For example, the consulting firm Rystad Energy recently forecast a price of $ 200 / barrel amid a loss of 3.5-4.0 million barrels per day of Russian supplies to the market. By Wednesday morning, consultants had raised their worst-case scenario to 4.3 million barrels a day of lost Russian supplies if Western countries joined the US embargo and China and India maintained stable purchases. Then the price of black gold will rise to $ 240 per barrel. "If more Western countries join the United States and impose an oil embargo on Russia, it will create a hole of 4.3 million barrels a day in the market that simply cannot be quickly replaced by other sources of supply," said Rystad's head of oil markets, Bjornar Tonhaugen.

"Oil prices must therefore rise in order to destroy sufficient demand and stimulate the supply response through higher activity - both invoices occurring over a period of several months. This will restore the balance of the market at a higher intersection of supply, demand and price, the expert said.

"This threshold could potentially be up to $ 240 / barrel, which will sufficiently limit demand on the international market over the next six months, both through direct impact on price and indirect impact on GDP," he continued.

The higher the prices, the greater the chances that the global economy will enter a recession in the fourth quarter of 2022. "The oil price of $ 240 / barrel will cause a global recession, and these levels will virtually self-destruct in just a few months, after which prices will fall sharply.

Just a day earlier, Rystad's head of analysis, Per Magnus Niswin, had painted a less bullish picture of the market, though not very different. "Russia exports about 7.5 million barrels a day, including oil, and China takes 2 million barrels a day," he said. "If you have a theoretical case that we should not allow anyone else to buy this oil, it will probably be very difficult for the market. "But we believe that in the worst case, something like 3.3-4.0 million barrels a day could be taken off the world supply market due to very severe sanctions, as well as some commitments that China can meet." he continued.

Additional production

Rystad believes that against the background of the crisis with Russian oil, additional production will appear to try to fill the supply gap. Such production can be seen even from the United States. By the end of the year, it included another 1 million barrels per day, but now added another 600.00 barrels per day to that figure. "There seems to be some kind of social license now for more drilling in Ukraine," Niswyn said.

OPEC could also boost output, not least through the "extraordinary release" of oil reserves, he predicted. "A deal with Iran could be made faster, and that could also provide more than 1 million barrels for the market," Niswyn said.

"Accelerated deal with Iran will definitely bring some peace of mind to oil markets," agrees Loustad Dickson, senior analyst at Rystad's oil markets. "However, the risk of an interpreted supply shortage is happening here on the market now, and the barrels coming from the included Iranian fields are not actually able to fully increase in a period of about 3-6 months.

There is also the possibility for Saudi Arabia to act independently of its OPEC + allies, which of course include Russia, and to provide part of the 2 million barrels per day immediately, due to the available spare capacity that it and the UAE have. "It is interesting to note that Saudi Arabia voted in favor of the UN resolution [condemning Russia's invasion of Ukraine], while the UAE abstained," Niswyn said.

"I think this is a sign that we can see some real action by Saudi Arabia to increase oil supplies in the future, perhaps unilaterally, without the consent of OPEC.

"Europe will be the main consumer affected by changes in oil supplies due to the shift from the moderately acidic Ural variety to other OPEC blends," Dixon said. "But we have not yet seen OPEC demonstrate opportunities to increase production. We must first see from the four or five major OPEC countries [Saudi Arabia, the UAE, Iran and Iraq] not only a commitment but also a real demonstration of the increase in production that will hit the market in the next few months.

Analysts Chris Wheaton and David Round of the American investment bank Stifel have slightly less bullish views on the market, assuming that most Russian barrels will not be lost to the market in a wider Western boycott, but will largely be able to find buyers east of the Suez Canal. But they still predict that "the diversion of trade flows will lead to a temporary shift in markets, which could lead to high oil prices - between $ 130 and $ 200 a barrel - between now and the end of 2022.

Reversal of trade flows

"We believe that the replacement of any of this Russian oil on European markets will require the reversal of current trade flows in the oil market," analysts said. "Currently, Russian trade flows are mainly to the west, while flows from oil producers in the Middle East are mainly to the east to Asian markets. If Europe had to replace all its 4 million barrels / day of oil from Russia, it would have to be replaced by producers from the Middle East and Africa.

But even in this more optimistic scenario, Stifel still sees restrictions that will remove some Russian supplies from the market. For example, if Russian oil cannot flow to Europe through the Druzhba pipeline, this crude oil will have to be exported through western ports, as the Russian system does not have the capacity to move it east.

But the bank estimates the capacity at the ports of Novorossiysk on the Black Sea and Primorsk and Ust-Luga on the Baltic Sea at just 600,000 barrels a day. For comparison, 900,000 barrels per day pass through the Druzhba oil pipeline.

Europe's refining industry must also have enough spare capacity to replace imports of Russian petrochemicals, Stifel analysts added. At an estimate of 4 million barrels per day of unused capacity compared to 2.5 million barrels per day of Russian imports.

"[But] it is not clear whether all this capacity can produce a product with the required sulfur content specification of 10ppm, and we believe there is a kind of 'glass ceiling' in the refinery's operating time of around 95%," analysts warn.