Searching For An Alternative To Russian Oil

Russian oil and sanctions… With the possibility of an embargo on Russian oil, the price of Brent oil per barrel reached 139 dollars. Markets are worried about a major oil shock, and the absence of Russian oil and gas at this point has the potential to cause a serious economic shock. Although Russian oil is not subject to sanctions yet, this card is also included in the political balances that the US will turn in favor of the continuation of the aggression. Europe, which is economically dependent, has to spend on defense against the Russian threat, and shifts to Americas resources to get rid of its dependence on Russian oil, actually points to a phenomenon that would be ideal for the USA. Europe wants to advance the Green Deal, but fossil fuel resources are still needed in the advancing phase for energy autonomy. Russias income sources being cut off, its reserves blocked, and its failure to pay bonds to creditors (which will be paid in rubles to certain creditors) will also pose a serious counterparty risk. If Russia will have difficulties, Europe will also have difficulties.

Strategic reserves and Iran… Russia is the third largest oil producer with a share of 12.3% and the second largest exporter with a share of 11.6%. The sanctions already imposed by the international community, though not specifically targeting Russian energy, have made typical buyers hesitant or intimidated to buy. In other words, even if there are no sanctions, there are withdrawals from the market.

While emphasizing its dependence on Russian gas, Europe is struggling to impose a Russian embargo without its US allies, and to attract more oil to the market through the Iran and Venezuela agreements. In the chart, you can see the comparison of Irans current production and capacity with Russias oil production. Iran will not fully replace Russia, even with increased capacity. The limited impact of the strategic reserve pumping of 60 million barrels ensures that the need is met to a certain extent, and will not prevent the market from having less oil than before. Moreover, the price of oil will not only be determined by the supply balance. Costs such as shipping will increase as pipeline transits from Russia to Europe will be interrupted. Keeping oil in ports means money.

All the while, on Tuesday, March 1, Shell was praised for severing ties with Russian firms Gazprom and Salym Petroleum and ending its involvement in the Nord Stream 2 gas pipeline. This conviction lasted less than a week. On Friday, March 4, as the price gap between Russias Ural crude oil and Brent crude, the international benchmark for oil prices, widened, Shell bought 100,000 mt at a record discount of $28.50 per barrel. Shell confirmed that it will continue to buy Russian oil, citing a tight market and several alternatives to supply crude.

Russia and Iran oil production and capacities… Source: Bloomberg

Conclusion? So far, oil and gas has not been included in government sanctions against Russia. An embargo would further tighten supply, push higher global oil prices even further, and deal a heavy blow to Russias already battered domestic economy. There is no market for oil lacking demand from a pandemic shock that would turn negative. On the contrary, the lack of supply has the effect of increased demand. The embargo effect causes prices to move into a rocket formation. It is not known how far the concerns in the natural gas and oil markets can pull prices in an environment of serious uncertainty. The permanent increase in the risk premium and the decline in global economies should soften the demand phenomenon and cool down the prices; however, in a universe where supply is zero, it will not matter how much the demand curve recedes under the following conditions. Is the decrease in demand due to a lack of money or a lack of goods? Definitely the second. It is feared that this situation is not limited to energy and includes both food and commodity groups. Supply must be able to get ahead of the demand curve so that prices can fall. Perhaps a recession that will come in 1-2 years will contain this effect.

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