Oil Industry Contemplates World Without Russian Crude

As oil prices shoot to levels unseen since before the 2008 financial crisis, the energy industry is asking a previously unthinkable question: How would it cope if it has to forgo Russian oil?

Crude prices shot close to $ 140 a barrel, grain prices leapt and industrial metals rallied Monday as war in Ukraine and the West’s response threatened to hit supplies of commodities that underpin much of the world economy. The surge builds on weeks of gains for raw materials and stands to add to inflationary pressures ripping through the world economy.

The jump in commodity prices followed a weekend statement by Secretary of State Antony Blinken that the US and European partners were discussing a ban on Russian oil imports. If enacted, an embargo would mark a significant change in the West’s response to Moscow’s war on Ukraine. Washington and allies have imposed punishing sanctions on Russia’s financial system and elite, but have so far skirted energy exports for fear of pushback from voters over gasoline and heating bills.

The change signals a newfound willingness to absorb higher energy costs by politicians on both sides of the Atlantic. “The political calculation is that any dislocation… is a better outcome than handing that money straight to Moscow,” said Paul Horsnell, head of commodities research at Standard Chartered.

Oil traders braced for immediate disruption in energy markets if Western companies are ordered to eschew oil from Russia — the world’s third-largest producer after the US and Saudi Arabia — and find alternative supplies.

Futures on Brent crude, the international benchmark, jumped 5.1% to $ 124.11 a barrel and earlier hit $ 139.13 a barrel, their highest level since a boom in China’s economy lifted commodity markets in 2008. US marker West Texas Intermediate traded 3.4% higher at $ 119.61 a barrel.

Before the war, Russian exports of crude and refined products met about 7.5% of the world’s oil demand. But after President Vladimir Putin invaded Ukraine in late February, many refiners hit pause on imports. They struggled to find funding and tankers for cargoes of Russian oil, and feared reputational damage as well as sanctions on the crude down the line.

The US is far less dependent on Russian energy than Europe, but about 8% of its imports of crude and refined products came from the country last year. If a ban were imposed, refiners will struggle to find alternative supplies of vacuum gas oil and fuel oil, which US refiners process into gasoline.

Russia’s attack on Ukraine helped push the price of oil to over $ 100 a barrel for the first time since 2014. Here’s how rising oil costs could further boost inflation across the US economy. Photo illustration: Todd Johnson

The challenge in Europe and the US could be addressed by reshuffling flows of oil around the world. Europe would buy more crude from the North Sea, West Africa and the Middle East to replace lost barrels.

There is little slack in the oil markets, however, and shifting demand from one place to another is not simple, notes Amrita Sen, founding partner at Energy Aspects, a consulting firm.

Supplies of oil were running low before war broke out, as demand recovered from pandemic lows. In December, commercial oil stockpiles in the Organization for Economic Cooperation and Development stood at 2.68 billion barrels, according to the International Energy Agency, their lowest level in seven years.

The US government and its allies are releasing crude from strategic reserves to tame prices and are also looking to adversaries for alternatives to Russian oil. The Biden administration is seeking to ease oil sanctions on Venezuela, The Wall Street Journal reported Sunday. Talks on reviving the Iran nuclear deal, meanwhile, have closed in on an agreement that could unlock Iranian oil for export.

Up to 800,000 barrels a day of Russia’s flagship Urals crude has continued to flow to Europe through the Druzhba pipeline. The Soviet-era pipe carries crude to refiners in Germany — Europe’s biggest economy — as well as Poland, Slovakia, Hungary and the Czech Republic. Those countries would face the biggest difficulties in the event of a ban, analysts said.

“If there’s an oil sanction, Druzhba will not flow and it’s just not going to be possible to replace those pipes,” said Ms. Late.

Central European refiners on the southern leg of the Druzhba pipeline, such as those run by Hungary’s Mol Group,

could import oil from the Adria pipeline. The pipe starts on the Croatian coast and has been renovated in recent years to bolster energy security in the region. Urals is moderately heavy and sulfurous, meaning it can be replaced by crudes such as Arab Medium, produced in Saudi Arabia, and most crudes produced in Iraq.

Refiners in China and India, meanwhile, may be in position to snap up some Russian oil at bargain prices. However, there is a limit on the amount of Russian oil Asia can buy. Shipments from Russian ports to India are logistically difficult, and refiners in the region aren’t geared up to run on Urals.

China has never imported more than 500,000 barrels of Urals a day, according to Ms. Late. If it were to buy all the Russian crude that headed to Europe before the war, China would have to take on an extra 2.7 million barrels a day — an unrealistic prospect. Indian refiners, meanwhile, are requesting that Russian and Kazakh oil be sold on a delivered basis, illustrating the difficulty they face in finding finance, insurance and tankers for the cargoes.

Complicating the picture: Several Russian refiners have closed in recent days as they ran out of storage, traders said. Highlighting the difficulties Russia has in selling its oil, they said Russia’s Sokol crude was offered at an unusual discount of $ 14 a barrel to benchmark Brent on Monday.

Whether oil prices, already up 60% in 2022, remain at these elevated prices or rise even further depends in large part on the response of the Saudi Arabia-led Organization of the Petroleum Exporting Countries. The cartel teamed up with Russia to backstop oil markets in 2017, and again when crude prices tanked in 2020, after a short-lived price war between Moscow and Riyadh.

Last week, the combined group, known as OPEC +, proceeded with plans to raise production incrementally, batting off calls from the US to boost output quickly to tame prices. Analysts said that stance could shift if Saudi Arabia and the United Arab Emirates, which have the capacity to pump more oil, fear $ 130-a-barrel oil will dent demand.

“If OPEC wishes to stabilize markets, it can not do it with Russia,” said Mr. Horsnell. “Russia is the cause of the interruption. Russia is the problem. ”

Write to Joe Wallace at Joe.Wallace@wsj.com

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