EU limits oil embargo scope
European Union countries have reached a consensus on an oil embargo as part of the sixth package of anti Russian sanctions. Yet the Druzhba pipeline will not be affected by the new restrictions, which are expected to cut Russia’s oil exports to the EU by about two thirds. By the end of 2022, flows of Russian oil to Europe could fall by as much as 90 percent, according to statements from European leaders.
The market reacted with higher oil prices. In the early hours of May 31, July Brent futures climbed above 122 dollars per barrel, a two month high. By 13:30 Moscow time, North Sea crude had dipped below 119 dollars yet remained the strongest level seen since late March.
Bloomberg estimates that the embargo could cost Moscow roughly 22 billion dollars annually. About 12 billion dollars would come from halting offshore exports, while another 10 billion dollars would be the result of stopping pipeline deliveries to Northern Europe. The same period could allow Moscow to profit up to 10 billion dollars from continuing southern Druzhba deliveries to Hungary, the Czech Republic and Slovakia.
How credible are Bloomberg forecasts?
Interviews cited by socialbites ca suggested varying assessments of Bloomberg’s damage estimates for Russia. Aleksey Belogoryev, deputy director of Energy at the Institute of Energy and Finance, described the 22 billion dollar loss from offshore exports as a reasonable figure.
Belogoryev noted that much of the impact would hinge on discounts for the Urals crude. If volumes are sold at a Brent equivalent discount around 30 dollars, the EU embargo could push the loss beyond 20 billion dollars. He added that the real question is whether Asia will be willing to absorb Russian oil at sizable discounts given risks of secondary Western sanctions.
Sergei Kondratyev, vice president of economics at the same institute, argued Bloomberg’s forecast did not account for the higher Urals prices observed since early 2022, rising to about 80 to 85 dollars per barrel, or roughly 580 to 600 dollars per ton, which would alter revenue projections.
Russia’s 2021 oil export revenue to the EU totaled about 48.3 billion euros, with most earnings from sea shipments. The following year saw deliveries of roughly 37 million tons via Druzhba and about 15 million tons from the southern branch. European purchases then totaled around 120 million tons. Kondratiev explained that the EU’s plan to abandon transit by the northern Druzhba branch involves Rostock and Gdansk, due to political opposition from Germany and Poland, and may reduce shipments through the pipeline significantly.
Under a strict scenario, the 2022 end could see European oil imports halved to around 60 million tons. Yet such a decline would not severely dent Russian budget revenues, given elevated Urals prices and compensating factors such as discounts on Brent.
The Urals price remained high, nearly double 2021 levels when adjusted for large Brent discounts. This kept Russia financially buoyant despite reduced volumes. Moscow is expected to pivot toward Asian markets, with Bloomberg projecting a loss of roughly 35 to 36 million tons in 2022 that would not be readily offset by demand in Asia. Analysts caution that the global oil market faces structural constraints on available capacity, which could limit any quick recovery for Russia.
Analysts also noted that Russia’s revenue mix could shift significantly toward China and India as European supply dwindles. The market is watching for how Asia’s appetite might absorb discounted Urals, potentially softening Russia’s overall export income even as volumes fall.
What lies ahead for oil prices this summer?
With Russia’s oil constrained, European buyers will need new suppliers, potentially creating artificial demand. A senior analyst suggested that global oil prices could rise by about 25 percent by the end of the second quarter as Europe reorients supply chains and seeks replacement barrels. In Europe, competition with LNG markets could push residual oil prices higher as demand shifts away from traditional buyers. The coming months may see Europe become a key, albeit strategic, oil market while demand patterns adjust.
One potential relief for the market would be a diplomatic breakthrough that could bring additional supplies online. If negotiations lead to a nuclear deal with Iran, sanctions on Tehran’s oil exports could be lifted, releasing an estimated 0.8 to 1.3 million barrels per day. Venezuela could add another 300 to 400 thousand barrels per day. In such a scenario, prices could retreat toward the 90 to 100 dollar range. Saudi Arabia’s production stance would also play a role, as there is little incentive to push prices lower further by expanding output.