Russian supply set to fall
The key supply uncertainty for the oil market this year has been how well Russian supply would hold up following a number of countries banning Russian oil, along with an increased amount of self-sanctioning. Russian supply has held up better than many were expecting, with India, China and a handful of other smaller buyers increasing their purchases of Russian crude oil, given the steep discounts available as other buyers have pulled back. As a result, exports in October were 7.7MMbbls/d, down just 100Mbbls/d year-on-year.
However, the biggest disruption to the crude oil market still lies ahead of us. The EU ban on Russian seaborne crude oil comes into effect on 5 December, which will be followed by a refined products ban on 5 February. The key question is whether India and China can buy even larger volumes of Russian oil. Their ability to do so is likely limited. Russia has already become India’s largest supplier, making up around 20% of total supply, and since the war, Russian barrels make up a little more than 18% of total Chinese imports, making Russia a marginally larger supplier of crude to China than Saudi Arabia. We expect that Russian supply will have to fall once the ban comes into full force and are assuming that supply in the first quarter of 2023 declines in the region of 1.6-1.8MMbbls/d YoY. The other uncertainty around Russian supply is the full impact of the G7 price cap. While the aim of the cap is to ensure Russian oil flows continue but Russian oil revenues are limited, it is still yet to be seen if Russia responds by lowering output. On several occasions, Russia has threatened to cut the supply of crude oil or refined products to any country that follows the G7 price cap.
How the Russia/Ukraine war evolves will be important for oil markets in 2023. While a de-escalation might not lead to the return of pre-war oil trade flows, it would remove a lot of supply risk from the market.
