Russia’s oil embargo pushes OPEC to take sides


A Russian oil embargo intensifies pressure on the Organization of the Petroleum Exporting Countries to increase production or side with Russia. As the war in Ukraine becomes a proxy conflict in a new Cold War, the cartel cannot hope to maintain its current studied neutrality.

President Biden on Tuesday banned Russian oil imports, sending the price of Brent crude to an intraday high of $133 a barrel. The UK may soon follow, but the main export market for Russian oil is Europe. Many buyers were already avoiding Russian rough for fear of violating financial sanctions or damaging their reputations. European energy giant Shell even announced its own private boycott of Russian oil and gas on Tuesday and apologized for buying a shipment of Russian oil last Friday after coming under public pressure.

Russia is the world’s third-largest oil supplier, producing around 10 million barrels of crude a day, about half of which is for export. The West imported about 4.3 million bpd in January. The lion’s share went to mainland Europe, with the US importing just 200,000 bpd and the UK even less, according to Bjørnar Tonhaugen, head of oil markets at Rystad Energy. But the US embargo may cause others to shun Russian crude and with no buyers, the global market could face a big shortfall. Rystad Energy estimates that cutting four million bpd from global supply would push crude prices up to $200 a barrel.

Alternative providers could mitigate the crisis. OPEC+ has about 4 million bpd of spare capacity, according to Rystad, concentrated in Saudi Arabia, Iraq, Iran and the United Arab Emirates. But opening their taps would be tantamount to siding against Russia, which co-chairs OPEC+, the expanded version of the cartel. At its last meeting, in the week after President Vladimir Putin invaded Ukraine, OPEC+ took just 13 minutes to decide whether to stick with its production plans. They didn’t even discuss the war in what would have been their shortest meeting ever.

US shale production could also be profitably increased at prices well below current levels, but this is not a short-term answer; OPEC could produce much faster. Additionally, differences in oil composition can make it difficult for customers to directly substitute one crude for another. For example, US refineries on the Gulf Coast use heavier Russian oil, which cannot easily be replaced by a lighter shale blend.

Europe, Russia’s biggest energy consumer (coal, oil and gas), did not announce an oil embargo on Tuesday. Instead, the European Union has unveiled a plan to reduce its “excessive dependence” on Russian energy. The bloc appears to have finally accepted that its pipeline diplomacy has failed as Mr Putin weaponizes energy. “We simply cannot rely on a supplier that explicitly threatens us,” said European Commission President Ursula von der Leyen.

Even though some European companies continue to buy Russian oil, the region faces a potential gas crisis. Moscow has threatened to stop sending gas through the Nord Stream 1 pipeline to Germany in retaliation for a Western ban on its oil. The EU has enough gas to get through the summer, but will need to replenish its stocks before next winter. The bloc has proposed a legal requirement that gas storage in the EU must be at least 90% full by October 1 each year. This would reduce the risk of a winter crisis, assuming the gas can be found.

He also promised to reduce its demand for Russian gas by almost two-thirds before the end of the year by increasing imports of liquefied natural gas and pipeline from Norway and Algeria, as well as pushing measures energy efficiency and cleanliness. energy facilities.

The Saudis demonstrated energy as a potent weapon against Moscow in their 2020 clash with OPEC+, which briefly sent crude prices below zero. OPEC may not want to sacrifice the recent easing to balance the market. Mr Putin needs energy revenue more than ever, with his war in Ukraine taking longer than expected and Russia’s foreign exchange reserves entangled in sanctions.

Guessing OPEC’s moves is a mug’s game, but the US ban on Russian purchases narrows its space to try to play it both ways. OPEC members have an uncomfortable choice to make.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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