Is Russia finally feeling sanctions impact?

Key Concepts

• Floating Storage: Holding crude oil on tankers at sea due to lack of immediate demand or logistical constraints.
• Geopolitical Premium: An increase in oil prices driven by political instability and perceived supply risks, rather than fundamental supply and demand factors.
• Non-OPEC Supply: Oil production from countries not affiliated with the Organization of the Petroleum Exporting Countries (OPEC).
• Limpit Mines/Olympic Mines: Types of naval mines used in recent attacks on tankers.
• Surplus: A situation where oil supply exceeds demand.

Oil Market Analysis: Geopolitical Risks & Supply Dynamics – A Detailed Overview

Introduction

The discussion centers on the recent surge in oil prices, triggered by attacks on tankers in the Black Sea and the potential for escalated Ukrainian efforts to disrupt Russian oil flows. The analysis, featuring Matt Smith, Lead Oil Analyst at Kepler, delves into the interplay of geopolitical tensions, supply dynamics, and the impact on global oil prices.

1. Recent Attacks & Ukrainian Strategy

The conversation begins with acknowledging the attack on tankers, initially misidentified as occurring in the Caspian Sea, but confirmed to be in the Black Sea off Novisk. The attacks are viewed as part of a deliberate Ukrainian strategy to pressure Russia by disrupting its oil exports. Smith highlights a progression in tactics, starting with the use of limpet mines attached to tankers at the turn of the year, and now extending to attacks at sea. These attacks impact both Russian and, significantly, Kazakh crude shipments. As Smith states, “It’s hitting them where it hurts.”

2. Floating Oil Storage & Sanctioned Barrels

A key point raised is the substantial increase in oil held in floating storage, reaching a multi-year high of approximately 120 million barrels. While not all of this is Russian, a significant portion (around 20 million barrels) is. However, the majority (50 million barrels) is Iranian crude, followed by 30 million barrels of Venezuelan crude. This highlights a broader trend of sanctioned barrels accumulating on the water due to limited buyer options.

Smith explains that Iranian crude is often transported to demand hubs like China and Malaysia and held offshore, essentially in a “parking lot,” awaiting purchase. He suggests that Chinese hesitancy due to sanctions, or a deliberate strategy to pressure Iran and Venezuela for lower prices, could be contributing to this buildup. Despite this, Iranian oil exports have increased to around 2 million barrels per day, as Iran prefers to keep production running and store the oil rather than curtail output.

3. Market Glut & Inventory Levels

The oil market is currently experiencing a surplus. Total commodities on water have increased by a couple of hundred million barrels, with onshore inventories also rising. However, the impact on prices is “muted” because much of the oil is in transit or held in Chinese inventories. Kepler estimates a surplus of approximately 500 million barrels in the first six months of the year, which will eventually flow into onshore inventories. This surplus is expected to weigh on prices.

4. Impact on Russia & Geopolitical Factors

Lower global oil prices and the need to offer discounts are negatively impacting Russia’s international oil sales. However, the destruction of domestic refineries allows Russia to export more crude. Despite this, geopolitical tensions – including situations in Venezuela, ongoing Ukrainian drone strikes, and the situation with Iran – are providing support to oil prices.

Smith points out a fundamental disconnect: “If you looked at it from a fundamental perspective, we should be anchored in the 50s [dollars per barrel]. But yet here we are just pushing mid60s for Brent.” He asserts that a “risk premium” is currently priced into oil, and the recent price increase is largely attributable to geopolitical concerns.

5. OPEC & Non-OPEC Supply

The discussion highlights the increasing non-OPEC supply alongside OPEC’s recent production increases (over the last nine months). While OPEC has paused increases due to concerns, non-OPEC supply continues to grow. This further contributes to the overall surplus.

6. Brent Price Discrepancy & Risk Premium

Smith explicitly states that Brent crude should be substantially below $60 per barrel based on fundamentals, but is currently trading in the mid-60s. This difference is attributed to the aforementioned “geopolitical premium” – a price increase driven by perceived risks rather than supply and demand.

Logical Connections

The conversation flows logically from the initial trigger (tanker attacks) to a broader analysis of the global oil market. It connects the attacks to Ukrainian strategy, then expands to the impact on Russian and Kazakh exports. The discussion then pivots to the issue of floating storage, linking it to sanctions and the behavior of key buyers like China. Finally, it synthesizes these factors to explain the current price discrepancy and the role of geopolitical risk.

Data & Statistics

• Floating Storage: 120 million barrels (multi-year high)
• Russian Oil in Floating Storage: Approximately 20 million barrels
• Venezuelan Oil in Floating Storage: Approximately 30 million barrels
• Iranian Oil in Floating Storage: Approximately 50 million barrels
• Iranian Oil Exports: Approximately 2 million barrels per day
• Estimated Surplus (First 6 Months of Year): 500 million barrels
• Current Brent Price: Mid-60s dollars per barrel (should be substantially below $60 based on fundamentals)

Conclusion

The oil market is currently characterized by a fundamental surplus, driven by increased non-OPEC supply and the accumulation of sanctioned barrels in floating storage. However, geopolitical tensions are injecting a significant “risk premium” into prices, keeping them artificially high. While fundamentals suggest lower prices, ongoing instability and the potential for further disruptions are likely to continue supporting oil prices in the near term. The situation is complex, with Russia adapting to sanctions by increasing exports despite refinery attacks, and Iran prioritizing production over storage costs.