Europe is expected to step up its oil war against Russia with a ban on products

Europe is once again poised to put pressure on Russia’s oil revenues, seeking to reduce President Vladimir Putin’s war chest amid a nearly year-long Kremlin offensive. in Ukraine drags on.

But some energy analysts are concerned that the proposed measures “could cause significant market volatility.”

The European Union’s ban on Russian oil product exports is set to begin on February 5. The embargo comes into effect just two months after the West took the most significant step yet to block Russia’s war-financing fossil fuel export revenues.

The Group of Seven implemented a $60 price limit on Russian oil on December 5. That followed an EU ban on Russian marine crude imports, as well as corresponding bans from other G-7 partners.

The EU’s upcoming embargo on Russian petroleum products is expected to be both more complex and disruptive than its predecessors.

As part of the sixth package of European Union sanctions against Russia, adopted last June, the 27-member bloc banned the purchase, import or transfer of marine crude oil and petroleum products from Russia.

The restrictions on Russian crude oil came into effect on 5 December, and the measures targeting Moscow’s refined petroleum products will apply from 5 February.

Analysts at political risk consultancy Eurasia Group warned that the upcoming EU ban “may have a more disruptive impact than previous EU crude import sanctions.”

Concerns about further supply disruptions come amid talks of further curbs on oil prices. The EU and its G-7 allies are reportedly considering a $100 per barrel price cap on key Russian oil products such as diesel and a $45 cap on discounted products such as fuel oil and industrial lubricant oil.

The thresholds, first reported by Bloomberg last week, are also expected to arrive on February 5, although the figures could change during negotiations between member states and allies of the bloc.

A spokesperson for the European Commission, the EU’s executive branch, said that discussions between member states are ongoing but declined to provide further information.

“If it is introduced, it would be at the last minute, which could create more confusion in the market,” said analysts at Eurasia Group.

“We expect some disruption, especially after the ban as EU markets continue to settle for other products,” Matthew Sherwood, an analyst at the Economist Intelligence Unit, told CNBC via email. . “We also expect this to put pressure on prices for oil products in general.”

Sherwood said the team at EIU expects to reverse some flows, with Moscow sending more barrels to China, India, the Middle East and Africa, and Europe picking up imports. India, China, Middle East and USA

This, he said, would likely increase transport costs.

Energy analysts have been skeptical about the impact of the G-7 price cap on Russian oil, especially as Moscow has been able to divert much of its European shipping to the likes of China, India and Turkey.

The EU urged India and China to support a price cap on Russian oil. Nevertheless, India’s oil imports were reported to have jumped to a five-month record in December as the country actively expanded its purchases of Russian crude, while China was seen as the second largest buyer of Urals in January.

“The impact of sanctions on Russian crude exports after two months of the European Union embargo has not been as devastating as some expected,” said Stephen Brennock, senior analyst at PVM Oil Associates in London. the research note.

His comments come shortly after Reuters reported that oil shipments from Russia’s Baltic ports were poised to jump 50% in January from December. “Not bad for the most controlled country in the world,” Brennock said.

“The same fate may not await their refined oil products,” he said. “China and India have been a lifeline for Russian crude exports with their large refining capacities But this also means that they will continue to take cheap imported crude oil and process it at home rather than buying refined oil.”

Shipping and pricing issues are major concerns when it comes to the EU ban on Russian oil product exports. In fact, it is when these challenges are taken into account that analysts at Eurasia Group believe that a production ban could have an even greater impact on markets than the previous crude embargo.

Sea transport of Russian oil products is considered more difficult because tankers must be thoroughly cleaned when changing from carrying one fuel to another, such as gasoline to lubricants. It also requires more ships than the crude sector because fuel tankers are smaller than crude carriers.

“This will create logistical challenges and higher transport costs if Russia tries to redirect production flows to Asia, as it has done with crude oil,” analysts at Eurasia Group said.

Russia retaliated against Western measures implemented at the end of 2022 by banning oil sales to countries that adhere to the price cap.

Kremlin spokesman Dmitry Peskov previously said a Western price cap on Russian oil would not affect its ability to maintain what it calls its “special military operation” in Ukraine.

“Once the EU embargo on Russian marine fuel exports kicks in, we are likely to see prices for gasoline and especially diesel continue to be supported by tightening supplies – especially if the embargo followed by a $100 per barrel price cap on diesel,” said Ole Hansen, head of commodity strategy at Saxo Bank, in a research note.

Hansen said on January 27 that this rate was about $30 below current market rates.

“Russia, however, may struggle to offload its diesel to other buyers, with major buyers in Asia increasingly interested in feeding their refineries with Russian crude with a huge discount, which can then be converted into fuel products that are sold at the normal world market price,” he added.

Hansen said that diesel supplies to Europe from the US and the Middle East could make up some of the barrels needed from Russia, “but there seems to be a shortage.”