MOSCOW: Russian oil output could fall by 500,000 to one million barrels per day (bpd) early next year after the European Union imposes a ban on seaborne imports from Monday, two sources at major Russian producers said.

The estimate is at the lower end of market analysts’ forecasts of the combined impact of the ban and a proposed price cap on Russian oil, although the sources said the true level would depend on several factors yet to be settled.

Alexei Kokin of Otkritie brokerage broadly agreed with their assessment of the likely impact of Western measures on Russian output.

“It’s roughly the same as the volume of seaborne supplies to the EU in recent weeks,” he said. “I don’t think they (Russian producers) will be able to divert that elsewhere.” The West wants to squeeze Russia’s finances to reduce its ability to fund the conflict.

Exports of crude, gas and oil products account for the bulk of Russia’s revenues, which have stayed high as disruption to production and sales following Western sanctions has been more than offset by high prices on international market.

Russia’s budget revenues from oil and gas jumped by over a third in the first 10 months of the year.

Before the Ukraine conflict began on Feb 24, Russia exported around eight million bpd of oil and oil products.

The EU, its biggest buyer, cut purchases in response to the conflict, but Moscow successfully diverted supply to Asia and exports slipped only slightly to 7.6 million bpd.

Looking ahead to next year, one of the main variables will be the ceiling G7 countries and the EU agree on importing Russian oil.

They are seeking to strike a difficult balance to limit Moscow’s oil income while avoiding oil price shocks on international market that surged around the time of Russia’s invasion, but have more recently cooled.

Some of the biggest importers of Russian oil, including China and India, are not part of the initiative. Moscow has said it would not supply oil to those who participate.

It is also unclear whether shipping and insurance companies will be able to move Russian oil around the world that has been bought for more than the agreed ceiling.

Navigating that obstacle could take time and cause disruptions, some analysts said, although US bank JPMorgan sees the impact of the cap as muted with Russia able to use its own ships and marshal China and India.

Others see a deeper impact.

Kirill Melnikov, analyst at the Centre for Energy Development, forecast a drop of one million to 1.5m bpd in Russian production next month, compared with levels last month.

Cap at $60?

The more Russian oil that is lost to world markets, the greater will be the likely impact on prices. That could benefit Moscow and other major exporters and penalise consumers in the West who already face the highest inflation in decades, largely because of energy costs.

“Even if the drop in exports is greater than expected, the impact on the budget is offset by the rise in prices, so budget revenues are unlikely to suffer significantly,” Igor Galaktionov of BCS Mir Investitsiy brokerage said.

European governments provisionally agreed on Thursday to a price cap of $60 per barrel of Russian crude, with an adjustment mechanism to keep the ceiling 5 percent below market values.

Published in Dawn, December 3rd, 2022

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