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Russia Disruptions Stretch Limits of Spare Capacity

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An already tight oil market has been pushed over the edge with the loss of Russian exports of Urals and refined products. Energy Intelligence calculates that Russian crude exports are down 1.5 million barrels per day while refined product exports have fallen 1 million b/d. Many traders are steering clear of Russian cargoes to limit financial and reputational risks, even though Western sanctions have not yet specifically targeted Russian energy exports. It is unclear if or when this disruption of one-third of Russia's petroleum exports will return or whether it could deepen. Benchmark Brent crude added some $30 per barrel in three days, reaching as high as $119/bbl on Thursday. Premiums for prompt delivery over later supplies are at historic levels, stressing the supply deficit. It seems nothing can stop the price rally. High-volume Urals are popular in Europe because of their short sailing time to refineries that were designed to handle this relatively heavy, sour grade. With Urals turning toxic after Russia’s Feb. 24 invasion of Ukraine, they dropped to a record discount of around $20 versus dated Brent, while refiners bid up everything else that was available on short notice. US and EU sanctions were designed to keep Russian energy and payments flowing, but refiners remain wary of measures aimed Russian banks and fear what could come next. Bans on Russian tankers in some countries have compounded problems. Russian crude exports by pipeline continue unabated: 1 million b/d to Europe, 800,000 b/d to China, 600,000 b/d via Espo to Asia. Espo has had some trouble finding buyers, but this could be resolved soon.

Relief from Opec-plus is not forthcoming, and it is not clear that higher output from the group could have much impact on this market given global spare capacity woes. The world has 2.5 million b/d in crude spare production capacity, half of that with Saudi Arabia, a quarter in the United Arab Emirates. It may not be needed if Russian flows are restored quickly. But it also may not be enough if more flows get caught up in "self sanctioning." Saudi Arabia also does not sell oil in the spot market. That means higher Saudi exports would only hit the market from May — too late to feed current demand. Even news of a coordinated 60 million bbl release from strategic reserves — oil that will be ready to refine in late March, early April — could not prevent Brent's super spike. The rest of Opec’s spare capacity is in Iraq, Kuwait and Algeria. Non-Opec members of Opec-plus — Kazakhstan, Oman, Azerbaijan, Bahrain and Brunei — combined hold less than 300,000 b/d. Russia’s spare of 135,000 b/d was never going to make a difference and is now off the table. The Mideast Gulf capacity is of a slightly better quality than Russian Urals but could replace it. Iran's roughly 1.2 million b/d of sidelined exports may be the market's best hope, assuming a nuclear deal that removes sanctions on Tehran can be cinched.

Stalled Russian product exports could keep prices on the boil — no matter how much additional crude comes to market. Russian product exports total about 2.8 million b/d, of which 1.4 million b/d heads to Europe, 500,000 b/d to the US and 200,000 b/d to Asia. The world is running especially low on diesel, which Russia exports in copious volumes. Margins are strong, but refiners are not running more crude because there is little spare capacity. Refiners failed to replenish low tank levels during the winter and soon move into deep spring maintenance ahead of peak summer demand. Gasoil in Europe jumped $200 per ton, or $27/bbl, in the past week. Global runs maxed out at 81.6 million b/d in November and are now 1 million b/d lower — partly because China cleaned house at some independent refineries. Crucially, capacity has been lost during the pandemic. The US has shut in close to 1 million b/d. Europe is running 1 million b/d lower due to high natural gas prices, although this could rise if gas prices dropped, says research firm IIR Energy. It also sees Japan shutting in 360,000 b/d in capacity during 2020-22. New capacity, mostly from China and the Mideast, will come on too late to replace these shut-ins and meet rising demand. Product tanks will struggle to replenish if Russian flows are not restored.

Topics:
Crude Oil, Oil Products, Oil Trade, Oil Prices, Oil Supply, Refining, Sanctions, Ukraine Crisis
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