Europe is set to ramp up its oil war against Russia — and markets are bracing for more disruption

Europe is once again poised to ratchet up the pressure on Russia’s oil revenues, seeking to deplete President Vladimir Putin’s war chest as the Kremlin’s nearly year-long onslaught in Ukraine drags on. But some energy analysts are worried that the proposed measures could cause “significant market dislocations.” The European Union’s ban on Russian oil product exports is slated to kick in on Feb. 5. The embargo will take effect exactly two months after the West took by far the most significant step to curtail fossil fuel export revenue funding Russia’s war. The Group of Seven implemented a $60 price cap on Russian oil on Dec. 5. That came alongside the EU’s import ban on Russian seaborne crude, as well as the corresponding bans of other G-7 partners. It is thought that the EU’s forthcoming embargo on Russian petroleum products will be both more complex and more disruptive than what has come before. As part of the European Union’s sixth package of sanctions against Russia, adopted in June last year, the 27-member bloc imposed a ban on the purchase, import or transfer of seaborne crude oil and petroleum products from Russia. The restrictions on Russian crude oil took effect on Dec. 5, while the measures targeting Moscow’s refined petroleum products will apply from Feb. 5. Analysts at political risk consultancy Eurasia Group warned the EU’s imminent ban “will probably have a more disruptive effect than previous EU crude-import sanctions.” Concerns about further supply disruptions come amid talks regarding further oil price caps. The EU and its G-7 allies are reportedly considering a $100 per barrel price cap on premium Russian oil products like diesel and a $45 cap on discounted products like fuel oil and industrial lubricant oil. The thresholds, first reported by Bloomberg last week, are also expected to take effect on Feb. 5, although the figures may change during talks between member states and the bloc’s allies. A spokesperson for the European Commission, the EU’s executive arm, said discussions between member states were ongoing but declined to provide any further details. “If it is introduced, it would be last minute, potentially creating more confusion in the market,” analysts at Eurasia Group said.

China and India

“We expect some disruption, especially in the immediate aftermath of the ban as EU markets continue to line up alternative supplies,” Matthew Sherwood, an analyst at the Economist Intelligence Unit, told CNBC via email. “We also expect this to put upward pressure on prices for oil products more generally.” Sherwood said the team at EIU anticipates some rerouting of flows, with Moscow sending more barrels to China, India, the Middle East and Africa, and Europe ramping up imports from India, China, the Middle East and the U.S. This, he added, would likely increase transport costs. Energy analysts had been skeptical about the impact of the G-7 price cap on Russian oil, particularly as Moscow had been able to reroute much of its European seaborne shipments to the likes of China, India and Turkey. The EU urged India and China to support a price cap on Russian oil. Nonetheless, India’s oil imports were reported to have jumped to a five-month record in December as the country actively ramped up 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 predicted,” Stephen Brennock, senior analyst at PVM Oil Associates in London, said in a research note. His comments come shortly after Reuters reported that oil loadings from Russia’s Baltic ports were poised to jump by 50% in January from December. “Not bad for the world’s most sanctioned country,” Brennock said. “The same fate may however not await its refined oil products,” he added. “China and India have been a lifeline for Russian crude exports given their large refining capacities. Yet this also means that they will continue to take cheap imported crude oil and process it domestically rather than buying refined oil.” Shipping and pricing issues are key concerns when it comes to the EU’s ban on Russian oil product exports. Indeed, it is when these challenges are factored in that analysts at Eurasia Group believe the product ban could have an even bigger impact on markets than its predecessor crude embargo. The seaborne transport of Russian oil products is thought to be more difficult because tankers must be deep cleaned when switching from carrying one fuel to another, such as from gasoline to lubricants. It also requires more vessels than the crude sector since fuel tankers are smaller than crude carriers. “This will create logistical challenges and higher transport costs if Russia seeks to redirect product flows to Asia, as it has done with crude oil,” analysts at Eurasia Group said.

‘A shortfall seems likely’

Russia retaliated against the Western measures implemented in late 2022 by banning oil sales to countries that abide by the price cap. Kremlin spokesperson Dmitry Peskov previously said a Western price cap on Russian oil would not affect its ability to sustain what it describes as its “special military operation” in Ukraine. “Once the EU embargo on Russian seaborne fuel exports kicks in, we are likely to see prices for gasoline and especially diesel remain supported by tightening supply – not least if the embargo is being followed up by a $100 per barrel price cap on diesel,” Ole Hansen, head of commodity strategy at Saxo Bank, said in a research note. Hansen said on Jan. 27 that this proposed level was some $30 below current market levels. “Russia may, however, struggle to offload its diesel to other buyers, with key customers in Asia being more interested in feeding their refineries with heavily discounted Russian crude, which can then be turned into fuel products selling at the prevailing global market price,” he added. Hansen said the supply of diesel to Europe from the U.S. and the Middle East could make up some of the missing barrels from Russia, “but a shortfall seems likely.”