Russia’s Export Windfall Starts to Wane

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Russia’s windfall hydrocarbon revenues have diminished, particularly for crude oil and petroleum products, now that benchmark prices have slid 20% since June. Though still in surplus, the federal budget, fattened in the first half of the year, is losing its luster, official data show. Energy Intelligence now believes that Russia’s oil and product exports will bring in $252 billion this year, down $8 billion from a previous estimate in mid-June when Brent hovered around $120 per barrel. In fact, the premium that Russia enjoyed in the second quarter thanks to the war in Ukraine has eroded in the third — compared to what it would have earned if it hadn’t invaded its neighbor — while in October-December the country will earn less on oil and product revenues than in a no-war scenario, our assessment shows. Due to the conflict and subsequent sanctions, Russia is poised to produce 500,000 barrels per day less in crude and condensate this year than in the no-war scenario, while refining throughput will be 400,000 b/d lower. In addition, Russian crude exports are discounted on average $15 per barrel compared to Brent. When Brent was sky-high, Russia could produce less and earn more — to the tune of $5 billion during the second quarter — despite the discount. But this war premium vanishes in July-September: export volumes fall slightly, the average price realization slips by $12/bbl to $85/bbl, and Russia ultimately rakes in $40 billion from crude exports — the same as the no-war scenario. In the fourth quarter, this trend intensifies so that crude and product exports bring in $60 billion, or $3 billion less than the no-war scenario. Tellingly, Russia’s finance ministry announced this week that the budget surplus, which had been 482 billion rubles ($8 billion) after the first seven months of the year, shrank to $2.3 billion after August.

The decline in oil and product revenues may continue in 2023, although market uncertainties abound. Our base-case scenario assumes: (1) the war will continue, (2) the EU bans on Russian oil and products imports will go ahead, (3) Asia will not be able to purchase all the orphaned Russian crude, and (4) Russian refiners will not find buyers for a 1 million b/d surplus of petroleum products that used to head to Europe. Annual crude and condensate production will decline by over 1 million b/d to 9.35 million b/d in 2023, and refiners will have to slash runs by some 500,000 b/d, our base scenario shows. This means that, using Energy Intelligence’s Research & Advisory forecast of $103/bbl for Brent next year, export revenues from crude and products would plummet to $185 billion, down $67 billion year on year. But 2023 will be terra incognita for energy markets, and reality is certain to dash some assumptions. A large part of the seaborne oil trade could go dark, and Russian crude and products could find their way into prohibited ports. China and India could agree to soak up additional barrels. Then again, there might not be enough vessels to handle such long-haul trips from the Baltic and Black seas to Asia due to shipping sanctions. And assuming the fleet is secured, it will be tough love for Russia since India and China will insist on significant discounts. So either way, Moscow could lose on crude income. Regarding oil products, refining margins have started to fall this month, and the outlook is dire ahead of the EU product embargo set for Feb. 5. With federal revenues slipping, Moscow can ill-afford to boost generous subsidies that it has been forking over to refineries.

The picture is more balanced when natural gas is thrown in. State-controlled Gazprom has been the quintessential case study of how a monopoly can cut supplies and bolster the top line. In January-August, it generated some $74 billion from sales to Europe, based on Energy Intelligence’s border price estimates, up from $34 billion in the same period a year ago. Volume sales to Europe and Turkey, however, tanked 42% to about 72 billion cubic meters. Gazprom is forecasting that its 2022 revenue will significantly exceed last year’s, which was a record 10.2 trillion rubles ($169 billion at the current rate). Moscow’s decision to restrict gas flows to Europe to just one line — via Ukraine — has catapulted spot prices and should keep Gazprom’s hub-linked prices high for at least the next couple months. Still, the policy is showing signs of risk: Gazprom’s revenues in August are estimated at $8.3 billion, which is lower than in all months from October 2021 to May 2022 even though the export price was significantly higher during the period. Unless the gas giant ramps up supplies, it is likely to encounter difficulties keeping 2023 revenues at current record-high levels. A price cap on gas, currently on the table in the EU, may help ensure that.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Oil Supply, Oil Prices, Refining, Gas Supply, Gas Prices, Ukraine Crisis
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