An agreement to ban Russian seaborn exports of oil and oil products reached by the EU this week will redirect trade flows and keep prices high, at least in the short term, Fitch Ratings says.
Oil delivered from Russia by pipeline is temporarily exempted from the ban to allow land-locked countries, such as Hungary, Slovakia and the Czech Republic, extra time to substitute Russian imports with oil and products from other sources.
The agreement, part of the sixth package of EU sanctions against Russia, bans purchases of Russian seaborn oil and oil products (about four million barrels per day (MMbpd), or two-thirds of Russian imports into the EU). It also contains pledges from Germany and Poland to wean off Russian pipeline imports by end-2022, which should ultimately cover 90% of all Russian oil and products imports into the bloc, reducing them to below 0.5MMbpd. Many details of the agreement are yet to be disclosed.
This ban will have a significant impact on global oil trade flows, with about 30% of EU’s imports needing replacement from other regions, including the Middle East (Saudi Arabia and the UAE have sustained production spare capacity of about 2MMbpd and 1MMbpd, respectively), Africa and the US. Russia should be able to redirect some of the displaced volumes into other countries, including India and China, which so far have been increasing Russian oil purchases. The use of spare capacity and Russian oil redirection should lessen the pressure on global oil supply in the medium term.
However, we believe that redirecting of all Russian oil and products volumes may not be possible due to infrastructural limitations, buyers’ self-restrictions and logistical complications, such as potential restrictions on providing insurance for cargos carrying Russian oil. As a result, we estimate that about 2MMbpd-3MMbpd of Russia’s oil exports, or about a quarter of the country’s oil production, may disappear from the global market by end-2022.
The high oil price environment, further propped up by the EU ban on Russian seaborn oil import, benefits most oil and gas producers. However, the positive impact may be tempered for companies operating in jurisdictions that have implemented or are planning to introduce windfall taxes on the sector, such as the UK.
We rate oil and gas producers through the cycle and expect oil prices to moderate in the medium term, therefore the higher oil prices that we anticipate in 2022 will not trigger portfolio-wide positive rating actions.
MOL Hungarian Oil and Gas Company (MOL) could potentially be mostly affected by the ban as it operates refineries in Hungary and Slovakia. Currently about 70% of MOL’s oil supplies are procured from Russia via pipeline, although those will be temporarily be exempted from the ban. Capital investments may be required to diversify oil import infrastructure and overhaul refineries so that they could process lighter sorts of crude oil, although additional investments may be partially or fully covered by the Hungarian government or the EU. At the moment MOL’s profitability is benefiting from significant discounts to Russian Urals’ prices compared with other oil benchmarks.