EU 6th Sanctions Package Targets Russian Oil Gas, Outcome Still Foggy!

Key Insights

• EU to propose 6th Sanctions Package.
• Russian oil imports to be targeted.
• Call on OPEC to increase.
• Instability oil market to increase, prices to be pushed up.

All signs seem to be on green in the EU to put in place European sanctions on Russia’s oil and gas imports. After almost 2 months of deliberations, political infighting and opposition from Germany, Austria and several other members, Brussels now seems to be having full support to hit the Russian economy by blocking oil and gas exports to Europe.

Oil prices fell on Monday in holiday-sapped trade in Asia as concerns about slowing economic growth in China, the world’s top oil importer, outweighed fears of potential supply disruptions from a looming European Union ban on Russian crude.

EU 6^th Package targets Russian oil

During the weekend, more support has been given to a proposed 6^th Sanctions Package that is being prepared by the EU Commission to sanction Russia’s war on Ukraine. Putin’s regime could be looking at a total blockade of its energy exports to Europe very soon. At least, this is what is being discussed, but some diffuse statements are also hitting the market already. Full-fledged sanctions immediately will be hurting both sides, but Russia most. A possible phase-out of Russian oil and gas by the end of 2022 however will be a major boon for Putin still, as it continues higher energy revenues for Moscow for longer.

Global oil markets are trying to get a grip of the matter, as demand and supply constraints worldwide are playing havoc with stability. The ongoing zero-tolerance policy of Beijing with regards to COVID in China is putting a damper on demand, pushing oil prices down. Still, to expect a full-scale demand destruction scenario soon is still to pessimistic. There are enough bullish fundamentals in place to keep crude oil hovering around $100 per barrel. A possible EU 6^th Package however could even push crude oil prices up to above $120 per barrel, as no additional volumes are available to counter a Russian blockade.

OPEC again to be pressured

OPEC’s unwillingness to open up new production and export volumes to calm the market is also underwriting higher oil prices in the coming weeks. Without additional spare production capacity of the OPEC group available soon, markets are going still for a possible supply crunch. A loss of 2-3 million bpd of Russian crudes and products is not able to be solved very quickly. Other production concerns are also still in the market, such as the increased instability in Libya, potential unrest in MENA and the black swan position of Iran.

In case EU energy sanctions will be supported fully, and put in place immediately, Russia’s answer could be also putting pressure on the market. Moscow will not take EU oil and gas sanctions very lightly. Putin has already indicated that Moscow could be reacting very swift by increasing not only its own anti-EU moves, but also will possibly revert to additional military means. A potential high alert on Russian cyber warfare actions on European critical infrastructure should be put in place already. Moscow could be targeting not only energy infrastructure in the West but also ports, airports or water plants.

Based on statements made by EU sources, Brussels could be presenting its 6^th Package by mid-week. The current information implies that the EU will be targeting banning Russian oil imports by the end of 2022. This would be in reality targeting a phase out of 2.2 million bpd of Russian crude oil and 1.2 million bpd of Russian petroleum products to Europe. The EU at present is relying on around 25% of its crude oil imports on Russia.

During the weekend several Russian vessels, or oil tankers holding Russian products, have been refused to enter European ports. At present, two non-Russian flagged vessels are sitting idle on the North Sea, waiting for the Port of Amsterdam to let them berth. Dutch trade unions have called on their members to block the unloading of Russian oil and gas in the Netherlands already. The Dutch move is followed by others around the European Union and UK already.

Russian oil heading to Asia

Russia’s energy revenues are going to be hit, but until now Moscow seems to be able to find additional clients elsewhere. Asian giant India already is showing a high appetite for Russian crudes. In a statement made by Royal Bank of Canada, the latter stated that India’s crude imports from Russia have grown from less than 100,000 bpd in 2021 to 800,000 bpd in April. More Russian crudes will be heading to Asia, as long as the USA and others are not putting in place additional sanctions on 3^rd parties. Chinese refiners have become however wary of Russian crudes, as some are worried about EU sanctions too.

Brussels also is expected to increase its own sanctions on Russian and Belarussian banks also. A possible push is being prepared to expand the list of Russian-Belarussian banks from the international payment system SWIFT.

Moscow will be hoping for possible opposition inside of the EU to block some of the new package. It is expected that Moscow will put some additional pressure on pro-Russian parties in the EU, with a main focus on Hungary and others. Russia’s hope that Berlin will be blocking energy sanctions are however fading, as Germany seems to be joining a 6^th sanctions package in full. Robert Habeck, German Minister of Economy, already stated that his government is not going to block it.

Oil market’s new future is unclear

The coming days the oil market could be looking at a water-shed moment, as for the first time ever a top-3 oil producer is being sanctioned. Some have indicated that Brussels is considering different approaches to pipeline and maritime oil imports. Pipelines are much easier to target and block than maritime options. In case this approach is being taken, the Russian Druzhba pipeline, supplying especially Germany, could be the first target. For a successful implementation the EU however still will need to convince southern European countries, such as Italy and Greece, to support all too.

The pressure is on, Moscow is not going to reap the rewards of its militarization of energy anymore for longer. The pain will be felt on both sides, but EU members are willing to pay the price. Russia’s energy future is in shambles for the next years if all is pushed quickly. Oil markets will need to readjust to a new situation, while Europeans will have to find new supplies. OPEC will be looked at with new interest, Saudi Arabia and Abu Dhabi could expect some increased diplomatic flight traffic.