Oil Price May Rise as EU Sanctions On Russian Oil Set to Begin February

Emmanuel Addeh in Abuja

Oil markets may face headwinds in 2023 as fresh Western sanctions and a price cap on Russian oil come into effect, leading to an output squeeze in global supplies and putting upward pressure on oil prices.

Demand from China is expected to pick up as zero-COVID restrictions ease, adding to the tightness in energy markets.

The next round of European Union (EU) sanctions on Russian oil products are due to take effect on February 5. It comes in response to the country’s invasion of Ukraine, and will affect refined petroleum products such as diesel.

It follows an EU embargo on seaborne imports of Russian crude effective December 5 and a G7 move to cap the country’s oil at $60 a barrel. Both measures aim to blunt Moscow’s export revenue while still keeping Russian crude flowing through global markets to prevent a supply shock.

According to analysts, the next round of sanctions — combined with a rebound in Chinese demand as zero-Covid restrictions ease — will likely squeeze oil markets and push prices higher. Russian crude output could fall by 1 million barrels a day

“We expect the European ban on seaborne Russian crude and refined products (to come into force on February 5) to result in a drop of Russian production of at least 1 million barrels per day in 2023, with Russia having difficulties in finding alternative markets,” said Giovanni Staunovo, a commodity analyst at UBS Global Wealth Management.

Indeed, Russia has threatened it would slash production by up to 700,000 barrels a day in retaliation to the G7 price cap, suggesting another potential hit to the country’s oil output, according to Business Insider.

The nation has been rerouting increasing volumes of its oil to India and China amid rising political tensions with Europe, one of its biggest markets, due to the war in Ukraine. In the week leading up to December 9, Moscow sent 89 per cent of its crude, amounting to about 3 million barrels a day, to Asia.

But shipments to Asia are now proving more difficult as European sanctions make it tougher for traders to find enough insured vessels to transport Russian crude.

According to Rystad Energy, however, the risk of a sharp decline in Russian crude production was more acute in mid-2022, when global supplies were tighter.

“As long as US shale performs and delivers growth, we see the market moving towards a more normal equilibrium,” Louise Dickson, a senior analyst at Rystad Energy told Insider.

Also, with global supplies expected to get squeezed, crude prices will likely soar past $100 a barrel next year, according to Saxo Bank’s Ole Hansen and UBS Global Wealth’s Staunovo.

“The embargo on seaborne crude from now and fuel products from February will likely have a price-supportive impact on markets,” said Hansen, head of commodity strategy at Saxo. The supply disruptions should add to the “expected tightness when demand picks up in China following the current virus surge,” he added.

Those risks raise the likelihood of oil prices topping $100 a barrel, according to Hansen.

“Following a soft first quarter, I see the price of Brent returning to a $90-100 dollar range. What happens later will depend on the strength of an incoming economic slowdown,” he added. UBS’s Staunovo echoed his view.

Oil prices have trended upward since mid-December after months of declines as supply comes under pressure following EU sanctions on seaborne Russian crude and threats by Moscow that it will slash production in retaliation to the G7-imposed price cap.

Brent crude, the international benchmark, has risen by more than 10 per cent from this year’s lows reached earlier in December, standing at around $83 a barrel.

“The real test will come on 5 February with the implementation of a products ban,” Rystad’s Dickson said.