Before the Russian Ukrainian war, Russia’s crude oil production reached the bottleneck of production capacity. According to the IEA April report, Russia’s output in March was 10 million barrels per day. After three consecutive months of no production increase from December 2021 to February 2022, there was a month on month decrease of 50000 barrels per day. The impact of the war on crude oil production in March has not been reflected. However, according to the production increase rules of OPEC + alliance in 2022, Russia has a production increase quota of 100000 barrels per day per month. In March 2022, Russia’s target output should be 10.33 million barrels per day. Russia’s actual output is 330000 barrels per day lower than the target output. Russia’s crude oil production capacity has been in trouble before the war. Therefore, for Russia, insufficient capital expenditure has led to the decline of old wells for many years from 2014 to now, and insufficient capital expenditure has led to the continued decline of production capacity in 2020. Russia is now unable to return to the normal production level of 10.46 million barrels / day before the epidemic.
In 2021, Russia’s crude oil export volume will reach about 5 million barrels per day. In terms of export destinations, 55% of Russia’s crude oil is exported to the European OECD, especially the Netherlands (14%), Germany (10%) and Poland (6%), followed by Asia and Oceania (38%), most of which reach northern China and Russia’s Kozmino port through ESPO pipeline and further transport to China and Asian markets. In addition, it also exports 300000 barrels / day (6%) to Belarus. China is the largest importer of Russian crude oil, accounting for 30%, and the United States accounts for only 4% of Russian crude oil exports. In 2021, Russia exported 700000 and 800000 barrels / day of crude oil to Europe and China respectively through pipelines, totaling 1.5 million barrels / day. In addition, it exported 400000 barrels / day to Belarus and other places. About 60% of the crude oil exports mainly rely on sea transportation. Because shipping needs to involve many links, on the one hand is the transport ship, followed by the opening of letters of credit by banks and insurance policies by insurance companies, the maritime export of Russian crude oil is more vulnerable to sanctions.
In 2021, Russia exported about 3 million barrels of refined oil per day. Among them, the European Union (43%) and the United States (18%), and diesel accounts for 42% of the refined oil exported to the European Union. After the Russian Ukrainian war, the export of Russian refined oil decreased, which also led to the soaring price of diesel in Europe. We believe that the decline of refined oil exports after the war will force the processing volume of Russian refineries to decline, and then force the production of Russian crude oil to decrease. In terms of the total export volume of Russian crude oil and refined oil, Europe accounts for 52%, China accounts for 21% and the United States accounts for 9%. The United States has announced a total ban on the import of Russian crude oil, refined oil, natural gas and other energy products. Although it has little impact on the direct export of Russian crude oil, it has an impact on the refined oil market, exacerbated the rise in the retail price of gasoline and diesel oil in the United States and China, and increased the inflationary pressure in the United States and China.
China and India’s crude oil import sources are relatively scattered, while Europe is most dependent on Russian crude oil import and the United States is most dependent on Canadian crude oil import. In 2020, China imported about 1.5 million barrels per day of crude oil from Russia, accounting for 15% of China’s total imports. In 2020, India imported about 50000 barrels / day of crude oil from Russia, accounting for 1% of India’s total imports. In 2020, Europe imported about 2.8 million barrels of crude oil from Russia, accounting for 30% of Europe’s total imports. In 2020, the United States imported about 100000 barrels of crude oil from Russia, accounting for 1% of the total imports of the United States. After the Russian Ukrainian war, according to IEA statistics, Russia’s maritime exports to China increased by 70000 barrels / day month on month. India significantly increased its crude oil imports from Russia, from almost zero in February to 300000 barrels / day in March, reaching 7% of India’s total imports. The United States banned the import of crude oil from Russia, but the amount of crude oil imported by the United States from Russia was not large. The key is still in Europe. At present, although the EU has not reached an agreement on banning Russian oil, we believe that Europe already has the problem of energy trust in Russia. Many European countries have put forward plans to gradually reduce their dependence on Russian oil, so as to diversify the sources of oil imports of European countries. Although in terms of quantity, the crude oil imports of China and India far exceed the crude oil exports of Russia, based on the long-term decentralized crude oil import structure of China and India, the construction of pipelines, ports, docks, ships and other infrastructure, financing payment methods, high transportation costs and reputation risks, we believe that it is difficult for Asia to undertake all the crude oil transferred from Europe, However, the flow of Global trade will be completely changed, and the conflict between Russia and Ukraine will have a sustained and far-reaching impact on the crude oil market.
It is difficult for Asia to fully undertake the amount of crude oil transferred from Europe. We believe that based on the long-term decentralized crude oil import structure of China and India, the construction of infrastructure such as pipelines, ports, docks and ships, as well as financing payment means, high transportation costs and reputation risks, it is difficult for Asia to fully undertake the amount of crude oil transferred from Europe, but the Global trade flow will be completely changed, and the conflict between Russia and Ukraine will have a sustained and far-reaching impact on the crude oil market.
With the withdrawal of foreign capital, Russia’s upstream capital expenditure will further decline, resulting in a decline in crude oil production capacity and actual production. For Russia, the oil field production process needs continuous investment, otherwise the production capacity will be exhausted. Now the situation facing Russia is that oil giants have withdrawn from the Russian market and banned further investment in Russia. Russia’s next economic sanctions may lead to a sharp decline in China’s oil fields and a decline in production. There has also been a serious decline in production capacity in history. Between the collapse of the Berlin Wall in 1989 and the Russian financial crisis 10 years later, due to brain drain and insufficient investment, Russia’s crude oil production has decreased for 10 consecutive years, from 11 million barrels a day to 6 million barrels a day, with a cumulative decline of 5 million barrels a day. Russia may face the dilemma of a sharp decline in crude oil production again.
The decline of Russian crude oil exports may begin to reflect in May. We believe that, on the one hand, the United States, Britain and other countries set the export ban exemption period for April 20 to increase imports before the end of the exemption period. On the other hand, traders said they were implementing the trade agreement reached before the Russian Ukrainian war, but Trafigura, Russia’s main oil buyer, said: “the company will fully abide by all applicable sanctions, and it is expected that the oil trade volume with Russia will be further reduced from May 15”. In addition, shell said on April 7, 2022 that it would stop buying Russian oil on the spot market. However, for the contracts signed before the Russian Ukrainian war, the company is legally obliged to accept the delivery of Russian oil, and shell defines the refined oil mixed with 50% or more of Russian oil as the oil produced in Russia. If the proportion of diesel and other oil products containing Russian oil is 49.9% or less, such transactions are not restricted, but on April 27, Shell said it would no longer accept refined oil mixed with products of Russian origin, which would strengthen restrictions on Russian oil exports. The EU plans to implement the sixth round of economic sanctions against Russia, including a phased ban on oil imports. If this round of sanctions is reached, it will further restrict Russian oil exports.
Russia suspended the supply of natural gas to Poland and other countries due to its refusal to pay rubles. On April 27, 2022, due to the refusal of Poland and Bulgaria to pay the natural gas contract in rubles, Russia will suspend the supply of natural gas to Europe and the two countries. The price of natural gas in Europe has soared and led to the rise of crude oil price. The market is worried that Russia will take further action in oil export. Russia’s total natural gas exports in 2021 were 252 billion cubic meters, while pgnig, Poland’s main natural gas company, imported 9.9 billion cubic meters of natural gas from Russia in 2021, accounting for 4% of Russia’s total natural gas exports and meeting 63% of Poland’s demand. According to the latest data of PG nig, imports from Gazprom accounted for about 53% of Poland’s consumption in the first quarter of 2022. Poland is also a major importer of Russian oil, accounting for 7% of Russia’s total oil exports. At the same time, Poland’s dependence on Russian oil exceeds 2 / 3. Now Rosneft is bidding to sell more than 4 million tons of naphtha, fuel oil, vacuum diesel and marine diesel from May to June. The bidding terms require payment in rubles and 100% advance payment. The requirement to pay rubles will be expanded from natural gas to petroleum products, or the requirement to pay rubles will be further extended to crude oil export, which will be further restricted.
According to IEA’s April 2022 report, IEA predicts that Russia’s crude oil production will decline by 3 million barrels per day from May, including a direct decline of 1.5 million barrels per day in crude oil exports, a decline of 1 million barrels per day in refined oil exports, and a decline of 500000 barrels per day in demand caused by Russia’s economic contraction in China. The three factors together will force Russia’s crude oil production to decline by 3 million barrels per day. Specifically, IEA’s assumption of Russian crude oil supply is based on the limited export of crude oil and petroleum products and the decline in the demand for Petrochina Company Limited(601857) products. Before the Russia Ukraine war, Russia exported about 5 million barrels of crude oil and 3 million barrels of petroleum products every day. IEA believes that Russia’s transportation to EU countries, China and Belarus through pipelines will continue, with a total of about 1.9 million barrels / day. Rosneft and Lukoil have refining assets in Europe, which will continue to receive another 500000 barrels / day of Russian offshore crude oil. In addition, 800000 barrels / day of offshore crude oil exports to China will be maintained or increased. Therefore, IEA predicts that crude oil export may be interrupted by about 1.5 million barrels / day, and Russia’s refined oil export will be reduced by 33%, equivalent to 1 million barrels / day. Coupled with the decline of 500000 barrels / day in Russia and China’s demand, the processing capacity of Chinese refineries will be reduced by 1.5 million barrels / day. Therefore, the total impact of the Russian Ukrainian war on Russian crude oil production is 3 million barrels / day.
We believe that the impact of the war on the production and export of Russian crude oil will gradually appear from May 2022, and the supply may drop by 3 million barrels / day. The flow of oil and gas trade in Russia, China, Europe and the United States will also change, and the conflict between Russia and Ukraine will have a sustained and far-reaching impact on the crude oil market.
Risk factors: 1. Risks of repeated epidemics and economic fluctuations: Recently, covid-19 virus variants have appeared in many regions and countries outside China, and the market has not relaxed its vigilance. Repeated epidemics in some regions will still inhibit global production and operation activities and adversely affect the demand of crude oil market. 2. Geopolitical risk: geopolitical factors such as Iran sanctions and Russia Ukraine conflict exacerbate oil price fluctuations.
