Brent crude oil prices will average $106.82 per barrel in 2022, according to analysts in a Reuters poll last month. That marked their highest estimate for this year compared to their previous forecast of $101.89 per barrel in May. The upward revision came amid concerns over supply tightness as the West is scrambling to replace Russian barrels. Brent has averaged $105 per barrel since the start of the year and stood at around $111 on Monday. However, some analysts warned of more dire consequences from a G7 move to cap Russian crude oil. The move is aimed to force Russia to sell its oil at lower prices, cutting its revenues used to fund its war in Ukraine. However, such a move has not been tested, especially on a producer as big as Russia. In addition, tight global production capacity and strong demand have so far given Russia the upper hand in the market.
Bjarne Schieldrop, the chief commodities analyst at Swedish bank SEB Group, said the G7 move sounds like a recipe for disaster. According to Bjarne, prices would surpass $200 per barrel if Russia decides to retaliate against the move by not selling its crude at a capped price, a decision that could cut its output by as much as 2 million bpd. JPMorgan analysts share a similar view, saying that Russia has a robust financial position and can afford to slash oil output by as much as 5 million bpd without excessively hurting its economy. Such a curtailment would lead to a market shortfall which could catapult prices to a “stratospheric” level of $380 per barrel.
For now, Russia is seeking to increase its crude flows to other buyers to compensate for the lost market in the West. Russia offered big discounts to attract buyers as mounting sanctions lowered the appetite for its barrels. For instance, Russia’s Urals crude had always sold at a discount to Brent, but the spread widened from fewer than $2 per barrel at the start of the year to more than $5 per barrel on the day Russia invaded Ukraine. It jumped to $34.45 per barrel as of May 31. However, market sources said the discount shrank to about $10 per barrel for Indian buyers when increased shipping, insurance, and dealer margins were taken into account.
Indian refiners have been snapping up discounted Russian barrels. Bloomberg reported that Russia has delivered between 1 million and 1.2 million bpd of crude to India. India’s Russian oil imports jumped over 50 times from April to June, an Indian official said. They represented around 10% of India’s total crude imports, compared to just 0.2% before the war in Ukraine. India’s crude oil imports from Russia surged by 286% year on year in the first four months of the year. India has also boosted purchases of Russian coal, which jumped more than 345% over the same period.
Russia also overtook Saudi Arabia as China’s top crude supplier in May, with total seaborne and pipeline deliveries soaring 55% year on year to nearly 8.42 million tons. That’s equivalent to about 1.98 million bpd, up more than 24% from 1.59 million bpd in April. Analysts estimated Russia’s total oil exports to stay around 2 million bpd in June, or 15% of China’s demand. China is one of few markets that continue to take Russian oil amid sanctions. Constrained by fuel export rules, Chinese private refiners are unable to reap profits from lucrative overseas markets. They have incurred losses in the past few months as COVID-19 lockdowns sapped domestic demand. Hence, cheap Russian crude provided them with some financial relief, while also forcing another sanctioned supplier Iran to slash prices of its oil to remain competitive in China.
