Oil on the boil as EU imposes partial ban on Russian oil; more worries for India

Crude oil is again on the boil following a far-reaching decision taken by the European Union to impose an embargo on Russian oil. The decision comes despite the palpable energy challenge confronting the EU. The embargo will come into effect in a phased manner over the next six months.

The decision has propelled the oil market higher, with Brent rising to $124 a barrel, the highest level since early March, when the Russia-Ukraine conflict broke out. WTI is not far behind at around $120 a barrel.

The EU decision has two components: seaborne deliveries and pipeline supplies. Seaborne deliveries into the EU are sure to be affected as two thirds of Russian oil imports into the EU come from this route.

Oil supplied through a specified pipeline is exempt as there are no ready alternatives. It takes time to construct pipeline infrastructure for oil supplies. An exception has been made for Hungary, Slovakia, and the Czech Republic on account of their high dependence on Russian oil.

The challenge for EU refiners is to find new sources of supply that are an appropriate substitute for Russian Urals (medium sour crude), and it is not going to be easy. There is a real risk that the downstream product quality will suffer.

The International Energy Agency is on record that the EU was still importing 3.4 million barrels per day of Russian oil in April. In other words, new sources to the extent of at least three million barrels a day will have to be found in the months ahead. This is what has sparked the current price rally.

According to observers, the EU may be looking to West Africa for replacement supplies. Nigeria, Angola, and Cameroon are said to be potential suppliers. The United Arab Emirates is also likely to join the list of suppliers to the EU.

At the same time, following the EU ban, Russian oil production is expected to decline. Yet, there may be some relief. It is widely believed that Asia will continue to be a market for Russian oil. Both China and India may ramp up their purchases. Chinese demand is likely to increase in the event the pandemic-related restrictions in Shanghai are lifted.

But the big spike in crude oil prices is a matter of worry for India, already reeling under imported inflation. Exacerbated by a weakening Rupee, high crude oil prices are likely to be a drag on the economy. It is not just oil. India’s coal shortage also continues to weigh on market sentiment.

According to reports, the country may face a menacing coal shortage in the third quarter of this calendar year ending in September. There is a risk that coal availability will be short by over 40 million tonnes during the period. A patchy southwest monsoon can add to the woes.

(The author is a policy commentator and commodities market specialist. Views are personal)   

Published on

June 01, 2022

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