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As European leaders are being confronted with news about the
events in Ukraine, pressure is mounting to extend economic
sanctions to energy. A ban on Russian coal has already been
approved, but core oil and gas flows remain unsanctioned in the
European Union, although calls for an oil embargo sound louder by
the day, and the European Commission is now proposing to end all
Russian oil purchases by the end of 2022. This Insight explores
whether, how, and when a ban on Russian oil and refined products
could be introduced.*
Even with a significant degree of self-sanctioning, shipping
data continue to show about 1.6 MMb/d of waterborne Russian crude
oil and 0.65 MMb/d of diesel landing on Europe's shores, while
pipeline deliveries through the Druzhba system remain around 0.8
MMb/d.
Adjusted for rationalized capacity and upcoming turnaround
maintenance, spare capacity across Europe proves to be limited,
making a short-fused ban on crude oil and refined products highly
unlikely.
A potential return of Iran to the global crude oil market, the
start-up of grassroots refining capacity in the Middle East, a
further increase in OPEC production, and the availability of West
African and Middle Eastern barrels shunned by India and China in
favor of discounted Russian crude oil could all contribute to a
market where replacing Russian oil is no longer considered a
mission impossible.
Additionally, a potentially prolonged downturn in China and
willingness in import markets across Africa and Latin America to
import more Russian product may render the decision easier to take,
albeit uncertain.
Most of these supply-side factors are highly uncertain, and
should they fail to materialize, they would dramatically affect
balances and ultimately prices, especially with Chinese demand
peaking in autumn.
As the European Union's goal is to reduce the eye-watering
contributions to the Russian treasury, an alternative solution is
to impose significantly higher import duties on Russian crude oil
and refined products, such that product netbacks fall
significantly.
It is likely that any headline-grabbing oil embargo would morph
into a roadmap for a gradual phaseout, differentiating between
crude oil and refined products, between seaborne and pipeline
flows, and potentially even between importers and their unique
situation, while leveraging robust emergency reserves.
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