Russian sanctions threaten oil output

“Unprecedented” sanctions imposed on Russia over the past several weeks could trigger the “biggest supply crisis in decades” for global energy markets, according to the International Energy Agency’s (IEA) March Oil Market report. 

The raft of sanctions Western countries have imposed on Moscow has included a ban on energy trade with Russia, with the UK and US announcing early last month that they would ban the import of Russian fossil fuels. 

Along with these restrictions, “major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country,” the IEA notes. Oil majors such as Shell and BP are among those severing or suspending business ties with Moscow.

Russia is a major anchor of oil markets. The country accounts for the lion’s share of global oil exports, “shipping 8 [mn barrels per day] of crude and refined oil products to customers across the globe.” 

Sanctions are expected to push down Russia’s oil output by some 3 mn barrels per day (bpd) this month as buyers shy away from the oil Moscow produces, the IEA said.

Compounding the problem of Russian oil falling out of the market is the fact that OECD oil inventories in January were already 335 mn barrels below their five-year average and at their lowest point since 2014, the report said. 

Oil producers will likely have to dig deeper into thinning reserves over the coming year to cover the supply crunch. This downturn in supply means prices are going up, and forcing a depression in demand. 

The IEA has revised downwards its projections for growth in oil demand to 2.1 mn bpd during 2022, marking a 1 mn bpd reduction from its previous estimates, which puts consumption levels at 99.7 mn bpd over the course of this year.

And tight supply + soaring prices = downward pressure on global GDP growth: High oil prices, which are up around 30% year-to-date, will continue to “increase inflation, reduce household purchasing power and are likely to trigger policy reactions from central banks worldwide — with a strong negative impact on growth,” the report said.

“Surging energy and other commodity prices, along with financial and oil sanctions against Russia, are expected to to appreciably depress global economic growth,” the IEA said.