EU/Russia Update
March 3, 2023
Given the one-year mark of Russia’s war against Ukraine, we thought it be useful to assess recent developments as it pertains to our industry. From an energy security standpoint, one could argue that Europe has fared better than initially feared. Months after invading Ukraine, Russia cut off an estimated 80% of the gas it had previously sent to Europe. At the time of writing, Europe looks set to avoid fuel shortages that had been forecast last fall after Russia curbed gas pipeline supplies to the region. Germany will be a particularly important country to monitor as they used to receive half of their gas from Russian pipelines in 2021, this amount now stands at zero. The EU has been fortunate to set aside enough gas to prepare for next winter. EU-wide gas storage is now 63% full and 30 percentage points higher than this same time last year, according to Gas Infrastructure Europe data.
The situation will continue to remain fluid as the EU and its allies continue to remain on the offensive from a policy standpoint. This week the EU sanctioned a Dubai-based subsidiary of Russia’s state-owned shipping giant that manages dozens of tankers. The sanctions targeting Sun Ship Management include an EU asset freeze and ban on financing the company, which the EU has identified as part of Sovcomflot. This is notable because Sun Ship helps to bring in more than 70% of Russia’s energy revenue, according to the Wall Street Journal. This in turn enables the Kremlin to finance the war in Ukraine.
Ultimately the new measures seek to make it more difficult and expensive for Sovcomflot to operate. The West has attempted to balance the need to restrict money Russia generates from its exports while allowing Russian oil and gas to reach global markets and keep prices low. This will result in continued rerouting of trade flows in 2023. Overall, we project Russian crude exports to drop by 1.2 million b/d in 2023, with marine exports lowered by 0.8 million b/d during the course of the year (Figure 1). In order to take more Russian crude, we believe India and China will reduce imports from the Middle East, US Gulf, West Africa, and the North Sea. Those routes were previously dominated by VLCCs. As a result, we believe Suezmax and Aframaxes will stand to benefit as Europe is expected to increase imports from the Middle East, West Africa, US Gulf, Latin America, as well as regional crude grades.
Figure 1: Russian Sanctions Impact - Crude
Source: McQuilling Services, JBC Energy
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