Tectonic Shifts in Oil Markets

The Russian Oil Conundrum

On the last day of 2022, as many were celebrating (or lamenting) the end of a volatile year, the Suezmax tanker Gladiator departed the north-western tip of Russia after loading 1 million barrels of Russian crude. After almost 23,000 km and 55 days at sea it discharged its cargo in Shandong province, China — as seen in the visualisation below. This is only one of dozens of tankers that have made this colossal journey since December. Before the EU import bans, the vast majority of Russia’s crude exports from the Arctic were shipped to Europe, the U.S. or the Caribbean. Since December, most if not all have gone to China and India. The increase in the average distance? 7,400–18,000 km. Global oil flows have shifted. They are becoming more inefficient and skewed in response to foreign policy, geopolitical risks and turbulent market conditions, impacting prices across the value chain.

This shift continues into refined products as we observe an increased quantity of seaborne cargoes from Russia now landing in North/West Africa and Turkey which would have otherwise almost certainly be consumed by the EU states, at least in such large quantities. China and India continue to purchase large proportions of Russian oil, often at discounted prices.

On February 5th the European Union banned imports of Russian oil products after similar sanctions a couple of months earlier in December for Russian crude, together with coal, steel, gold and other commodities including caviar and vodka (at Commodity Labs we prefer tequila anyway). This has been mandated together with the below price caps for Russian oil, subject to changes:

• $60 USD/BBL for crude oil
• $100 USD/BBL for premium petroleum products
• $45 per barrel for discounted petroleum products

Russian oil production remained near pre-war levels throughout last year. Russia’s exports to global markets fell by more than 500,000 b/d to 7.5 million b/d in April and have only risen slightly since. Shipments to the EU, North America and OECD Asia-Oceania have plunged from 4.5 million b/d, now seeking alternative destinations. Willing buyers in Asia, namely India and to a lesser degree China, have snapped up discounted crude oil cargoes. These two countries took in more than 70% of Russia’s crude exports in many of this year’s early months.

While Russian crude oil shipments are mostly heading to Asia, a more diverse set of buyers is emerging with shipments heading to North Africa, Turkey and the Middle East rising by 300 kb/d, 240 kb/d and 175 kb/d, respectively. Latin America received roughly the same as before the war.

It remains to be seen if there will be sufficient appetite for Russian oil products now that the price cap is in place or if its production will start to fall under the weight of sanctions. Revenues are already dwindling together with the Ruble. In February, Russia’s estimated oil export revenues fell to $11.6 bn — a $2.7 billion decline from January when volumes were significantly higher, and nearly half of pre-war levels.

European economies are filling the hole by sourcing a far larger proportion of crude from the U.S., likewise for LNG although limited liquefaction capacity in terminals on Europe’s coasts has been a bottleneck over the past 12 months. The Arab Gulf is also exporting increased quantities of oil products to Europe, especially with a ramp up in refining capacities coming online in Kuwait, Oman and Saudi Arabia.

The Oil Story in Data (August)

• Global crude oil production: 74.20 million barrels/day (down 2.2% YoY).
• Global oil supply: 100.9 million barrels/day
• Global oil demand: 101.46 million barrels/day
• Global oil refining capacity: between 103.0 and 104.9 million b/d
• Global oil inventories: total oil inventories for crude and major refined products stand at roughly 7,092,000,000 barrels (up 0.81% YoY), with crude inventories making up 3,185,000,000 (or 45%) of this.
• Oil prices: ICE Brent is at $84.48 USD/barrel (down 15.38% YoY, but near the top end of the range looking at the past six months).

Research Highlights (August)

Iran has unsustainably low petrol prices

Iran has extremely cheap petrol due to heavy state subsidies. Prices start at only $0.03 per litre, a tiny fraction of prices in Western nations such as the $1.10 paid at American pumps or the $1.88 in the UK.

However, Ali Ziyar, deputy head of the National Iranian Oil Refining and Distribution Company, told local reporters this month that consumption had risen 20% since March to 124 million litres/day, but domestic refining capacity was capped at 107million litres. This growing gap between supply and rising demand has led Iran to tap into its strategic reserves and import petrol for the first time in a decade. This move comes as Iran’s hardline government under President Ebrahim Raisi is grappling with economic challenges due to U.S. sanctions and is wary of potential public unrest. Despite the need to end the ultra-cheap petrol policy, raising prices is politically sensitive after past price hikes in 2019 led to violent protests. Violent revolts in response to increased fuel prices have also been seen in other countries this century, including Kenya earlier this year and Nigeria in 2012.

Current fuel subsidies are a burden on the government, and while analysts see the situation as unsustainable, there is hesitation to make the necessary changes due to potential backlash. It puts the government under pressure to speed up development projects to increase refining capacity, although refining expansion projects can take years to be completed.

China toys with further economic data secrecy

Zhang Jianhua, Director of China’s National Energy Administration, has called for stricter secrecy in the energy sector to protect national security. He noted that foreign forces are closely monitoring China’s energy transformation efforts, aiming to distort its strategic plans and stability. China is the largest energy consumer and faces challenges in achieving carbon neutrality due to high carbon emissions from energy use.

To achieve this, Zhang recommended integrating secrecy into government agendas and coordinating protection measures across all levels. He proposed regular inspections, personnel screening, and risk assessments to prevent secret leaks.

Notably, while this initiative seeks heightened security, it may not lead to a complete ban on energy-related data release. Steps can be taken to ensure security without compromising necessary data for economic analysis and decisions.

This comes after China’s decision to suspend reporting its July youth unemployment rate (to reconsider the methodologies used) stirred up heated public debates, as many perceive it as a cover-up for an unflattering statistic. It came after a spate of record-high readings had been released over the past few months, with the latest showing more than one in five (21.3%) young Chinese were jobless in June.

The Iraqi Ceylon pipeline remains offline

Meetings between the Iraqi and Turkish oil ministers this week failed to restart the northern Iraqi pipeline to Ceyhan, which had a capacity of 470,000 b/d before its late-March shutdown. A longer disruption leaking into next year wouldn’t be surprising. Turkey’s use of its export terminal control for negotiations over past Kurdish exports, transit fees, and economic matters is evident. Increased runs and trucked exports offset roughly 100,000 b/d of the outage, and southern exports grew by 125,000 b/d from March to July. This contributes to an expected total Iraqi crude production of 4.39 million b/d in August, 170,000 b/d above Iraq’s OPEC+ pledge, encouraging the continuation of keeping Kurdish exports offline.

Will Venezuelan oil production increase?

Press reports this week highlight ongoing discussions between the U.S. and Venezuela, focusing on potential additional sanctions relief for PDVSA, Venezuela’s national oil and gas company. These talks, while not new within the Biden administration, have gained attention due to emerging indications of diplomatic progress, however despite these optimistic signs, there is a degree of skepticism surrounding President Nicolas Maduro’s willingness to make the required political concessions necessary to ease all trade restrictions and foreign investment related to PDVSA. Given the prevailing uncertainty about the possibility of “free and fair” elections in 2024, Venezuelan crude production will likely maintain a relatively flat trajectory, hovering around current levels of 770,000 b/d.

Nonetheless, there exists a glimmer of potential upside in the supply outlook for Venezuelan oil if the U.S. were to implement targeted waivers similar to those extended to Chevron in November 2022. The restricted but notable bilateral trade with the US Gulf Coast, coupled with Chevron’s re-engagement in the country, has already contributed to a noteworthy increase in production by approximately 100,000 b/d. Expanding trade activities with the US and Europe, particularly through enhanced diluent supply, could potentially pave the way for a modest growth trajectory beyond 800,000 b/d. It is important to note that while complete relief from PDVSA penalties seems unlikely, such a scenario could still raise Venezuelan crude supply to 1.1 million b/d within 12–18 months. However, this projected increase would still fall short of the pre-sanctions levels witnessed in late 2018.

It is important to acknowledge the significant challenge posed by the U.S. opposition to the Maduro government, especially as the country moves closer to a presidential election in 2024. This political context adds complexity to the prospects of the projected supply increase. The interplay of international diplomatic dynamics, economic considerations, and political motives shapes a multifaceted landscape for Venezuela’s oil future. Although I wouldn’t hold my breath as Venezuela has been digging itself a grave since their crisis began in 2010.

To continue reading monthly stories and special research articles in between, you can follow Commodity Labs here on Medium or receive editions for free directly via email through our Substack.