Rystad: US ban on Russian oil creates inverse mirror image of pandemic oil market collapse

US President Joe Biden announced Mar. 8 a ban on US imports of all Russian oil, ratcheting up sanctions for Russia’s invasion of Ukraine.

"Russian oil will no longer be accepted at US ports," President Biden said in remarks at the White House. "We will not be part of subsidizing Putin's war." The ban is expected to be devastating to the Russian economy, which relies on oil and gas production for more than 40% of its revenue, Rystad Energy said.

Oil prices surged on the announcement, with the Brent benchmark jumping $5/bbl after the news broke.

Joining the US, the UK government announced a plan to phase out imports of Russian oil and petroleum products by end 2022. The European Union also unveiled a plan to wean itself off Russia's fossil fuels.

“Although the impact on US supply may be limited, prices are soaring because the ban makes it more of a challenge to trade in Russian oil and more likely that other countries may follow suit. The oil market volatility is an inverse mirror image of the 2020 pandemic collapse, as compounding supply factors push prices higher,” said Bjørnar Tonhaugen, Head of Oil Markets at Rystad Energy.

Russia usually exports 4.8 million b/d of crude oil to the market, and another 1.4 million b/d is exported via Russia produced in other FSU countries, notably Kazakhstan. The US only imported 200,000 b/d of crude from Russia last year, and the UK less than half of that.

The US imports nearly 500,000 b/d of petroleum products from Russia, predominantly unfinished heavier oils, into its complex refineries. As imports from Russia will no longer be possible, refineries need to source their feedstocks elsewhere.

“The market, and US buyers, already started to shun barrels from the Russian region immediately since the outbreak of the war, owing to swift implementation of financial sanctions, restricted commodity financing from lenders or as a result of political decisions to opt away," Tonhaugen said. 

“The 4.3 million b/d of ‘Western’ crude imports from Russia in January 2022 cannot be replaced by other sources of oil supply in a short period of time. Therefore, oil prices must rise to destroy sufficient demand and incentivize a supply response through higher activity – both of which will happen with a time lag of several months – to rebalance the market at a higher price,” he continued.

“How high oil prices will need to go depends primarily on how much and for how long the market will need to shun export barrels from Russia and whether other buyers, such as China, will step in to increase its purchases of oil from Russia.”

“OPEC+ holds approximately 4.0 million b/d in spare crude capacity, but there are few signs that the Middle East producers are opening the taps, at least not yet. With no additional OPEC+ response, the most significant potential oil supply shortage since the 1990 Gulf War (when oil prices doubled) could be upon us,” Tonhaugen said.