Thinking about Russia-Uzbekistan Conflict from the Evolution of Global Crude Oil Pattern
In the future, North America’s production increase and other non-OPEC+ will meet the EU’s import demand, and Russia’s crude oil production and export volume will decline significantly. In 2023, oil prices will be more inclined to demand-side pricing logic.
In the past 70 years, there have been five major changes in the global crude oil supply structure, the two with the greatest impact: one was from the 1950s to the mid-1970s, when the center of gravity of crude oil production moved eastward, and the Middle East replaced North America; the other was after the financial crisis. The US shale oil revolution.
The general trend of the evolution of the global crude oil consumption pattern. From the perspective of geographical location, the center of gravity of consumption has shifted eastward, from Europe and the United States to the Asia-Pacific region; in the Asia-Pacific region, Japan before the mid-1970s and China after the 1980s. The proportion of crude oil consumption gradually decreased, while that of non-OECD members gradually increased. In the increase in the proportion of non-OECD members’ consumption, China contributed more than half, and the rest was roughly contributed by other BRIC countries.
In the sixth round of sanctions promulgated on June 3, the EU proposed to completely ban the seaborne import of Russian crude oil from December 2022, and to completely ban the seaborne import of some crude oil products from February 2023. So far, both the EU and Russia’s crude oil trade has seen significant changes.
EU imports of Russian oil have dropped significantly. Before the Russia-Ukraine conflict broke out, the EU’s dependence on Russian oil imports was about 27%, but recently it has dropped to about 16%. From January to February, the EU’s crude oil imports from Russia were about 2.5 million barrels per day, and it has dropped to about 1.4 million barrels per day in October. The reduced part is mainly made up by the increase of imports from the Middle East, Africa, Norway and South America. EU imports of crude oil from the United States have not increased significantly.
Russia’s exports of crude oil and crude oil products to Western countries have fallen sharply, while exports to India, Turkey and China have increased significantly. Comparing the situation in January-February and September-October, Russia’s exports to the EU fell by about 1.5 million barrels per day (about 500,000 barrels per day of oil products), and exports to the United Kingdom and the United States fell from 800,000 barrels per day to zero. Exports from OECD Asian countries also fell to zero from 500,000 bpd. On the other hand, exports to India, Turkey and China saw significant growth.
Overall, the United Kingdom and the United States reduced their imports of Russian crude oil and increased their imports from North America and Northern Europe; while India increased its imports of Russian oil, it partially reduced its imports from the Middle East, Africa and Northern Europe, and its overall imports increased; China’s imports did not increase. The increase was due to increased imports of Russian oil, which reduced imports from South America, Africa and the Middle East.
The Russia-Ukraine conflict has indeed brought adjustments to the global crude oil trade pattern, but it has not reached the level of “restructuring”, and has not significantly changed the overall framework of the balance of the two major trade regions. Before the Russia-Uzbekistan conflict, Russia exported about 5 million barrels per day of crude oil and oil products to the European Union, the United Kingdom, the United States, and OECD Asian countries (Japan and South Korea). After deducting the EU pipeline crude oil import exemption, it was about 4.3 million barrels per day. It is the amount of Russian exports that need to readjust the market, which accounts for about 6.5% of global crude oil and oil product exports.
According to IEA estimates, after the European Union completely banned Russian seaborne crude oil imports in December, Russia still needs to find new export markets for about 1.1 million barrels per day of crude oil, and the EU needs to continue to find import substitutes for these crude oils. There may be the following three situations in the future:
First, the increase in production in North America will be the mainstay, supplemented by other non-OPEC+ countries to meet the import demand of the EU, the growth of Russia’s exports to the Asia-Pacific region or other parts of the world will tend to stagnate, and Russia’s crude oil production and exports will decline significantly . The three major international crude oil agencies predict that Russia’s crude oil production in 2023 will decrease by 1.5 million to 2 million barrels compared with before the conflict, while North American production will increase by 1 million to 1.5 million barrels per day, and other non-OPEC+ producers will increase by another 500,000 barrels per day. In 2023, oil prices are more inclined to demand-side pricing logic.
Second, with North America and other non-OPEC+ production increases and shadow trade to meet the EU’s import needs, Russia will slightly increase its exports to the Asia-Pacific region and other regions. Coupled with shadow trade, Russia’s oil production will decline slightly.
Third, it is more difficult to increase production in North America due to short-term energy and environmental protection policies. Due to production capacity, infrastructure facilities, and political and geopolitical conflicts, the rest of the non-OPEC+ production increase is limited, and OPEC maintains or even further cuts production out of “maintaining the balance between supply and demand” or political factors , are difficult to meet the EU’s import substitution needs; the Asia-Pacific region or the rest of the world’s imports of Russian oil growth is sluggish, and Russia’s exports will drop sharply. The probability of this situation is low, but the supply shock to oil prices should be the largest.
Although the current trend of international oil prices clearly shows the logic of demand expectation pricing, the market seems to have insufficient pricing for supply shocks.