New Western measures aim to turn up the heat on Putin’s oil revenues. Analysts are underwhelmed

Freight wagons carrying oil and fuel at a petroleum products terminal in Riga, Latvia, on Feb. 2, 2023.

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The West’s latest attempt to ramp up its oil war against Russia may cause some market dislocation, but some energy analysts remain far from convinced that the restrictions will constitute a “transformative event.”

An EU ban on Russian oil product imports came into effect on Feb. 5, following similar restrictions on EU crude oil intake, implemented on Dec. 5. The Group of Seven industrialized countries, the European Union and Australia on Friday set a ceiling for the price at which nations outside of the coalition may purchase seaborne Russian diesel and other refined petroleum products and still benefit from Western shipping and financial facilities.

The price cap coalition, which is composed of Australia, Canada, the EU, Japan, the U.K. and the U.S., seeks to deplete Russian President Vladimir Putin‘s war chest amid Moscow’s ongoing hostilities in Ukraine.

The EU and its G-7 allies said last week that they had set two price caps for Russian petroleum products — one is a $100-per-barrel cap on products that trade at a premium to crude, like diesel, and the other is a $45 cap for petroleum products that trade at a discount to crude.

Some analysts warned that the measures could cause “significant market dislocations” and that the EU embargo was more complex and more disruptive than what had come before.

Not everyone shares this assessment.

“There is an overwhelming assumption that this will be a huge disruption to everything. I don’t really think this will be a transformative event,” Viktor Katona, lead crude analyst at Kpler, told CNBC’s “Squawk Box Europe” on Monday.

“I don’t really think that this will have the impact that a lot of people can imagine, and the main driver for this will be actually human creativity — and the constant search for a new solution, for a new supply chain or for a new route,” Katona said.

“This will bring us basically into the same story that we had with the oil price cap back in December. People expected a lot of things. In the end, it never really happened,” he added.

‘Russia may struggle to compensate fully’

As part of the sixth EU package of sanctions against Russia that was 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 applied in early December and February, respectively.

Russian President Vladimir Putin chairs a meeting with members of the Security Council via a video conference on Feb. 3, 2023.

Pavel Byrkin | Afp | Getty Images

Asked whether those predicting significant market disruption because of the measures targeting Russia’s refined oil products were likely to be wide of the mark, Katona replied: “I think they are. I would say that the main development of the past two weeks when it comes to Russian diesel has been happening not in Europe, but in North Africa.”

Katona said North African countries were expected to receive at least 6 million barrels of ultralow sulfur diesel from Russia, estimating that this was roughly one-quarter of what the European Union used to purchase from Moscow.

He explained that a “substantial transformation clause” remains under question because North African countries are not members of the price cap coalition.

“Basically, you drip one droplet of something else into a cargo of Russian diesel and it is already Moroccan, it is already Algerian, it is already Tunisian,” Katona said. “All of these countries have seen quite a substantial uptick in Russian diesel flows. And our expectation is that Feb. 5 kicks in, and there will be a lot of flows from North Africa, basically Russian in all but name.”

Ahead of the Western ban on its oil supplies, the Kremlin reaffirmed its opposition to the measures and warned it would cause more market imbalances.

“It will lead to further imbalances on the international energy markets,” Kremlin spokesman Dmitry Peskov told reporters Friday, according to Russian news agency Tass. “Naturally, we are taking precautions to protect our interests from the risks associated with it.”

Energy analysts at political risk consultancy Eurasia Group said that the latest wave of Western sanctions was likely to dislocate flows rather than cause a severe disruption of supplies, noting that oil product markets have had several months of advance notice to prepare for the restrictions.

“Still, while flows are readjusting, some disruption is possible, especially in the middle distillate market, which was already tight before the latest sanctions,” analysts at Eurasia Group said in a research note.

“Russia may struggle to compensate fully for the loss of EU buyers, especially if a recovering China stops exporting so much surplus fuel and instead starts to import significant quantities again,” they added.

‘Shipments will take longer’

“This is a very substantial disruption to really a key industrial field across much of the euro zone,” Edward Bell, commodities analyst at Emirates NBD, told CNBC’s “Capital Connection” on Monday.

“Russia was the dominant external supplier of diesel to euro zone economies, so the fact that this embargo is now in place means that there will be a little bit of a readjustment and scrambling to get those additional barrels.”

Bell said it appears as though Russia has so far been able to find new markets or expand diesel exports to historical markets, such as to Turkey and partners in North Africa and Asia. “All this means those shipments will take longer,” he added.

“This is not a positive indicator in terms of the direction for prices going downward and easing the burden of energy prices on consumers but in terms of actually disrupting supply it doesn’t like we are in any kind of panic stations just yet.”

Bell suggested Saudi Arabia’s diesel exports to Europe could be set for a “big uptick,” following the West’s embargo on Russian petroleum products.



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