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Russian Oil Embargo Pushes OPEC to Take Sides (WSJ)

Wall Street Journal title: Russian Oil Embargo Pushes OPEC to Take Sides
WSJ subtitle: Oil cartel producers can open their taps to help balance the market, but it would mean choosing the West over Moscow
By: Rochelle Toplensky
Date: 8 March 2022

“A Russian oil embargo ramps up pressure on the Organization of the Petroleum Exporting Countries to increase production or side with Russia. As the war in Ukraine becomes a proxy conflict in a new Cold War, the cartel can’t hope to maintain its current studied neutrality.

President Biden banned imports of Russian oil on Tuesday, sending the price of Brent crude to an intraday high of $133 a barrel. The U.K. may soon follow, but the key export market for Russian oil is Europe. Many buyers already were avoiding Russian crude due to fears of breaching financial sanctions or hurting their reputations. European energy giant Shell on Tuesday even announced its own private boycott of Russian oil and gas and apologized for buying a cargo of Russian oil last Friday, after coming under public pressure.

Russia is the world’s third-largest oil supplier, producing around 10 million barrels per day of crude, about half for export. The West imported about 4.3 million bpd in January. The lion’s share of that went to Continental Europe, with the U.S. importing just 200,000 bpd and the U.K. even less, according to Bjørnar Tonhaugen, head of oil markets at Rystad Energy. But the U.S. embargo may cause others to avoid Russian crude and in the absence of buyers the global market could face a big shortfall. Rystad Energy estimates that cutting four million bpd from global supply would send crude prices to $200 a barrel.

Alternative suppliers could ease the crunch. OPEC+ has about 4 million bpd of spare capacity, according to Rystad, concentrated in Saudi Arabia, Iraq, Iran and the United Arab Emirates. But opening their taps would be to take sides against Russia, which co-chairs OPEC+, the wider version of the cartel. At its most recent meeting, in the week after President Vladimir Putin’s invasion of Ukraine, OPEC+ took just 13 minutes to decide they would stick to their production plans. They didn’t even discuss the war in what was reportedly their shortest meeting ever.

U.S. shale production also could be profitably ramped up at prices far below current levels, but that isn’t a short-term answer; OPEC could produce much more quickly. Also, differences in oil composition can make it difficult for customers to directly substitute one crude for another. For example, U.S. Gulf Coast refineries use heavier Russian oil, which can’t be readily replaced with the lighter shale blend.Brent crude oil price*Source: FactSet*Continuous contractFeb. 25March9095100105110115120125130$135a barrel

Europe, Russia’s biggest energy customer—in coal, oil and gas—didn’t announce an oil embargo on Tuesday. Instead, the European Union unveiled a plan to cut its “overreliance” on Russian energy. The bloc seems to have finally accepted that its pipeline diplomacy has failed as Mr. Putin weaponizes energy. “We simply cannot rely on a supplier who explicitly threatens us,” said EU Commission President Ursula von der Leyen.

Even if some European companies continue to buy Russian oil, the region faces a potential crisis in gas. Moscow has threatened to stop sending gas through the Nord Stream 1 pipeline to Germany in retaliation for a Western ban on its oil. The EU has enough gas to make it through to the summer, but will need to rebuild its inventories before next winter. The bloc has proposed a legal requirement that gas storage in the EU be at least 90% full by Oct. 1 every year. That would lower the risk of a winter crunch, assuming the gas can be found.

It also promised to reduce its demand for Russian gas by nearly two-thirds before the end of the year by increasing liquefied-natural-gas imports and pipeline gas from the likes of Norway and Algeria as well as pushing energy-efficiency measures and clean-energy installations.

The Saudis demonstrated that energy was a powerful weapon against Moscow in their OPEC+ standoff in 2020, which sent crude prices briefly below zero. It might be that OPEC isn’t willing to sacrifice the recent detente to balance the market. Mr. Putin needs energy income more than ever with his war in Ukraine taking longer than expected and Russia’s foreign-exchange reserves tangled in sanctions.

Second-guessing OPEC’s moves is a mug’s game, but the U.S. ban on Russian purchases shrinks its space for trying to play it both ways. OPEC members have an uncomfortable choice to make.”



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