Oil gets stuck in pipes

According to Kommersant, against the backdrop of the EU embargo and the oil price ceiling, oil exports from the Russian Federation fell by more than 10% in the first two decades of December. The oil industry prepared for the embargo in advance and redirected EU supplies to Asian markets, while the effect of the ceiling is not yet so noticeable due to the transition period provided for by the sanctions. Oil production in the Russian Federation has not yet suffered against the backdrop of increased refining. The Russian authorities plan to introduce retaliatory measures to the price ceiling, but their content and effectiveness are still unclear. Experts expect that production in the Russian Federation will begin to decline from January due to export restrictions.

Russian oil exports to non-CIS countries via pipelines and the sea collapsed in two and a half weeks of December by 11% compared to the previous month, to about 560 thousand tons per day, Kommersant’s interlocutors who are familiar with the situation say. This is happening against the backdrop of the imposition of an embargo on Russian oil by the EU countries on December 5, as well as a ceiling on commodity prices (set at $60 per barrel). So far, the effect of the ceiling is not so noticeable, since during the transition period of 45 days it is possible to ship oil without the application of the ceiling for transactions concluded before December 5.

The Russian Federation is preparing retaliatory measures to the price ceiling, but it is not yet clear what they could be, given that the countries that introduced the ceiling (the G7 states and the EU) have already abandoned Russian oil. Press Secretary of the President of the Russian Federation Dmitry Peskov on December 19 said that the development of the corresponding decree was close to completion, but “additional proposals” were being considered.

The new restrictions introduced by Western countries have not yet had a strong impact on production. Thus, Russian companies produce about 1.49 million tons per day, which is even slightly higher than in November. Thus, the Russian Federation has every chance to approach the level of production of 535 million tons by the end of the year, increasing production by 2% compared to 2021. According to the estimates of the Center for Strategic Research, it follows from the presentation of the center (Kommersant has it), production in the Russian Federation due to the price ceiling and the embargo may decrease in 2023 by 10-25% compared to the results of this year.

Export restrictions are forcing Russian oil companies to increase oil refining. Thus, the loading of Russian refineries increased by 1.5%, up to 794 thousand tons per day. Despite the decline in oil prices, oil companies receive damper payments from the budget for the supply of diesel fuel to the domestic market, while in December the petrol damper will enter the negative zone (minus 5 thousand per ton, according to Petromarket estimates as of December 20).

Due to payments for diesel fuel, oil companies will still remain in the black. However, a decline in oil prices may lead to a further reduction in damper payments, which means a deterioration in the economy of refineries against the backdrop of export restrictions.

Now the situation that we already observed in March 2022, when exports were declining amid stagnation in production, may repeat itself, Sergey Kondratiev from the Institute of Energy and Finance believes. According to the expert, this is due to the fact that the decline in production takes time – companies must decide on a strategy and carry out the necessary technical measures.

Russia does not have large oil storage facilities that would allow it to regulate supplies without allowing production cuts, Mr. Kondratiev emphasizes. According to the expert, it is highly likely that the Russian Federation will reduce production as early as January 2023 and it will remain at low levels until spring due to relatively weak demand on the world market and the ban on the import of Russian oil products introduced by the EU countries from February 5, 2023.

In April-May 2022, Rosneft, which suffered from EU sanctions and “self-restrictions” of Western traders, reduced production and exports the most, adds Mr. Kondratiev. Now the positions of Rosneft, which has redirected supplies to Asia, look quite stable, but LUKOIL may find itself in a difficult situation due to the suspension of supplies to its own refineries in Italy and Romania.

Dmitry Kozlov