Much ado has been made about the European Union enacting a partial (90%) ban on Russian oil. I have written in the past about how sanctions have quite failed to cripple the Russian economy, but have contributed significantly to debilitating inflation and supply chain issues in the west.
(I am certainly not opposed to sanctions, but I think it is important for people to understand sanctions have their limits, even when structured honestly and competently – which, for the most part, these are not.)
But the thing about the Russian oil ban versus financial sanctions, however, is it’s not going to be real. This is all a giant game. Europeans are still going to be using Russian oil, but they are going to get it through middlemen that take a cut for offering European politicians plausible deniability. Essentially, the European response to the Ukraine war is going to be to import inflation for their citizens and congratulate themselves for taking a stand against genocide.
This is an interesting piece from MarketWatch – Why India is the big winner as EU’s Russia oil ban redraws energy trade map – where Michael Tran, global energy strategist at RBC Capital Markets, spells out how the “new” energy regime will work:
“As the EU weans from Russian refined product, we have a growing suspicion that India is becoming the de facto refining hub for Europe,” said Michael Tran, global energy strategist at RBC Capital Markets, in a Tuesday note.
It’s all part of the seismic displacements taking place across the physical market for crude and products in the aftermath of Russia’s late-February invasion and the resulting rounds of sanctions placed on Moscow.
EU leaders agreed Monday to embargo most Russian oil imports into the bloc by year-end as part of new sanctions agreed at a summit. While the agreement marks a hard-fought policy victory for the West, the reshuffling of global trade flows are set to prove economically inflationary for all nations involved as long as the war drags on, Tran said.
That will make sourcing barrels more expensive and keep upward pressure on oil pricing, the analyst said. The U.S. oil benchmark CL.1, ended the day lower on Tuesday after earlier trading near a three-month high just shy of $120, but ended may with a strong gain. Brent crude BRN00, the global benchmark, ended higher and was also up for the month.
Meanwhile, India’s new role comes as it loads up on discounted Russian crude, which it has been refining at a torrid pace and then exporting refined products ….
So does India’s example mean that Russian crude no longer bound for Europe will just end up elsewhere? That’s unlikely, according to Tran.
He expects the EU ban to back out around 1.2 million to 1.5 million barrels a day (mbd) of Russian exports. They will have to find a home elsewhere, particularly Asia.
So far, China has yet to increase imports, let alone Russian barrels, but scope for India, which has “already been backing up the truck and buying discounted Russian barrels in size,” to further boost purchases appears limited. Over time, Russian storage will fill and production will begin to falter, Tran said.
From the RBC Capital Markets note:
This should not be surprising. One of the best reasons for prioritizing energy independence is the energy sector is dominated by bad actors. (See my earlier post – Understanding the market for oil.) And in a period like this, the “good” actors are hoarding resources. They are aren’t useful energy allies.
Our own market in the US has become so dysfunctional that we are getting damn near rationing diesel (critical for the supply chain). See Bloomberg – US East Coast Fuel Crisis Deepens Ahead of Peak Season.
This is an absolute mess. And you can pretty much tell at this point that the situation with utilities seeking fuel this summer is going to be a shitshow. Natural gas is already reliably trading above the worst-case scenario assumptions regulators included in their rolling blackout warnings. It is not a good time to be governed by an administration that favors hiring climate panic activists over people with experience with the oil and gas industry. Much like the baby formula crisis, the incompetence of this administration can lead to a bona fide humanitarian crisis.