Russia's Oil Ban Drives Change in Global Energy Dynamics

Western sanctions on Russian fossil fuels are having a significant impact on global energy flows, with China and India increasingly taking advantage of Russian oil discounts and Middle Eastern suppliers redirecting their crude to Europe. This is putting significant pressure on Russia's energy sector and is likely to lead to further changes in the global energy landscape in the coming years.

Russia is offering deep discounts to Asia’s biggest oil buyers as it tries to retain market share after imposing a price cap on the sale of its crude and petroleum products. The cap bars the shipping, financing or insuring of Russia’s seaborne crude unless it is sold for $60 a barrel or less—a sanction leveled in response to the invasion of Ukraine.

As European nations seek to secure their energy requirements, Saudi Arabia, the United Arab Emirates and other major Middle East energy exporters are shifting focus from their traditional markets in Asia to sell at a higher price.

As nations around the world attempt to secure enough fossil fuels to meet their energy needs over the next few years, longstanding energy-trade ties are facing disruption. This could also lead to a re-drawing of the global energy map, with potential impacts on geopolitical alliances as governments seek to strengthen ties that would underpin their energy security.

Moscow is seeking to reduce the impact of sanctions by lowering prices and increasing market share in China and India, which have not joined the West in instituting a price cap. According to the International Energy Agency, Russia has been selling its flagship Urals crude for as much as $17 less than the cap since late November.

"Even if prices were to rise to $100 a barrel, China and India could continue buying Russian oil if they had access to their own insurance," said Amrita Sen, director of research at London-based oil consulting firm Energy Aspects.

Last month, Russia's exports to China surpassed Saudi Arabia's, making Russia the world's biggest oil exporter to China. According to data from Beijing's General Administration of Customs, Russia exported 1.9 million barrels a day to China in November, up 16.5% from the previous year. Meanwhile, Chinese imports from Saudi Arabia totaled 1.61 million barrels a day, down 11% from the previous year.

Russia and Saudi Arabia are allies in the OPEC+ group of oil producers, but they say they haven’t coordinated their response to the West’s price cap.

According to commodity-data provider Kpler, Moscow’s shipments to India grew to 1.4 million barrels a day in November, compared with just 36,000 barrels a day a year earlier. Meantime, Indian refiners are exporting oil products that contain processed Russian crude to the European Union—an exemption allowed by the bloc’s sanctions program.

Western nations are trying to reduce the revenue Russia gets from its oil exports in order to dent Moscow’s war chest. However, they still want to keep Russian oil flowing to markets in order to stabilize global prices.

Not all buyers in Asia are interested in discounted Russian oil. U.S. allies Japan, South Korea and Thailand have virtually stopped importing from Russia.

Deputy Prime Minister Alexander Novak said on December 23 that some of Russia's oil products had been rerouted to Africa and Latin America.

"Our energy resources are being redirected to other markets, the markets of friendly countries, as a result of unfriendly actions," he was quoted as saying by Russian news agency Interfax.

In recent months, Oman, the U.A.E., Morocco, Nigeria, Senegal and Brazil have all bought cheap Russian diesel and gasoline, even though some of them are crude producers themselves.

Brent crude prices have dipped since Russia threatened to cut off buyers who adhere to an oil price cap, raising concerns about growth due to a resurgence of Covid-19 in China. Brent traded at around $84 a barrel early Friday.

As Russia's energy exports put pressure on prices in Asia's biggest markets, Saudi Arabia and other major Middle East crude producers are rerouting some of their oil to Europe. This shift is helping to keep prices stable in the European market, while putting upward pressure on prices in Asia.

This is a significant change from the past few years, during which Saudi Arabia has been focused on expanding its presence in China and India. According to Eurostat, Saudi Arabia was the fastest-growing supplier of oil to the EU in the third quarter, with a 9.1% market share of imports, compared with 5.1% on average last year.

According to Kpler, Saudi shipments to Egypt increased to nearly 1 million barrels a day in November, up from 600,000 barrels a day in October and 866,000 barrels a day a year earlier. Most of these shipments are then re-exported to Europe through the Suez Canal.

In Poland, Saudi state oil giant Aramco has agreed to increase its supplies to the country’s top energy firm PKN Orlen by up to 337,000 barrels a day next year. This will significantly increase Poland's energy supply, as Russia exported only 220,000 barrels of oil to Poland last year.

Aramco has committed to supplying TotalEnergies with 100,000 barrels of oil per day to make up for lost Russian supplies, according to French and Saudi energy officials. In July, TotalEnergies also signed a deal with Abu Dhabi National Oil Co. guaranteeing 300,000 tons of diesel per month, or 75,000 barrels per day, to France in case of shortage, two French officials and an Emirati official said.

TotalEnergies and Adnoc did not respond to a request for comment. Aramco did not immediately comment.

In recent months, Saudi Energy Minister Abdulaziz bin Salman has signaled that the kingdom is aiming to supply more crude to Europe. This is part of Saudi Arabia's effort to diversify its customer base and reduce its reliance on the United States. Europe is a key market for Saudi crude, and the kingdom is hoping to increase its market share there.

Prince Abdulaziz stated at an industry event in October that his company is engaged with many governments, including Germany, Poland, the Czech Republic, Croatia, and Romania.

Germany has announced that it will get crude oil from Kazakhstan to replace supplies from Russia, which it will stop buying from in January.

Members of the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) say they see no need to reverse a 2 million-barrels-a-day production cut extended earlier this month. This is despite the oil markets seemingly still adjusting to the price cap and Russia’s threat of retaliation.

According to Kpler, Russia's seaborne oil exports were down in December by 22% from the average for the first 11 months of the year. Energy Aspects' Ms. Sen said that Russia is not able to fully replace its lost European buyers.