Is Russia in trouble on oil and gasoline? Economist Report

Selling more oil at higher prices should be the dream of an oil state. But for Russia it is the sign of a new, punitive phase in its war with Ukraine. Months of Ukrainian drone attacks on refineries have limited Russia’s ability to produce refined fuels, such as diesel and gasoline, and turned the world’s third-largest oil producer into a gasoline importer. Energy companies have sought to cut losses by selling unrefined oil overseas, pushing exports to a ten-month high in March.

THE UKRAINIAN ATTACKS

In Ukraine’s latest attack, on April 2, its planners extended their reach. They managed to plant explosives in a refinery 1,115 km from the border. The attack set fire to a unit responsible for 3% of Russia’s refining capacity. While it left no lasting damage, others were more successful.

Overall, the Ukrainian barrage knocked out a seventh of Russia’s refining capacity, according to data firm S&P Global. Maintenance work and flooding in the city of Orsk on April 8 knocked out other production lines. Wholesale prices on the St. Petersburg International Mercantile Exchange have surged. Ukraine, which has itself been the target of attacks on energy infrastructure, hopes the assaults will slow the flow of dollars into its enemy’s war machine and reduce its support.

The Russian oil giants are the ones suffering the most. Refineries that normally produce petrol and diesel for foreign customers at increased prices have been diverted to domestic production. The volume of diesel leaving Russian ports has hit a five-month low. At the same time, oil barons are looking for new customers for their excess crude, on which they will suffer losses of about $15 for every barrel that could have been exported as refined product, says Sergey Vakulenko, a former oil industry executive .

Although Ukrainian attacks have slowed since Vladimir Putin’s re-election in March, Ukraine has given no indication they will stop. Ukraine can launch drones faster and cheaper than Russia can repair its refineries. Some plants, such as the Norsi refinery in the city of Nizhny Novgorod, have been particularly slow and expensive to repair, partly because access to the equipment is hampered by Western sanctions. From this month, Russian oil producers will also have to reduce the amount of oil they extract from the ground by around 5%, as part of a production cap agreed with OPEC+, an oil cartel.

So far, motorists have been protected from “unscheduled maintenance” caused by Ukraine (as the Russian Energy Ministry says). The government kept prices under control by banning gasoline exports for six months starting March 1 and striking a deal with its client state Belarus. In the first half of March, Russia imported 3,000 tons of fuel from Belarus, compared to zero in January. Fearing that this is not enough, officials have also asked neighboring Kazakhstan to set aside a third of its reserves, amounting to 100,000 tonnes, in case Russia needs them, Reuters reported. If the attacks continue, they could start to push up prices.

THE CONSEQUENCES ON RUSSIAN FINANCES

The consequences for Russia’s public finances are expected to be limited, even though oil revenues account for 34% of its budget. Rosneft, the state-owned oil company, will pay a smaller dividend if it fails to recover lost revenue, but many doubt whether these dividends will reach state coffers. The government will even save some money by paying fewer per-barrel subsidies to refineries. Russia’s biggest revenue is resource taxes. And because these are collected in the form of royalties at the wellhead, the government is indifferent between the oil exported as crude oil or as refined fuel, Vakulenko says. As long as Russia is able to export crude oil, it can collect royalties.

WHAT CHANGES FOR THE OIL MARKET

Observers outside Russia are watching whether Ukraine’s attacks will affect the global oil market. They haven’t had much of an impact yet, but the price of Brent has risen 19% this year to just under $90 a barrel, thanks to OPEC+ supply constraints, better-than-expected global economic conditions and disruption in the Red Sea. Few observers are more in the game than Joe Biden, who faces an election in November. His administration has urged Ukraine to stop the attacks, fearing they will provoke harsh retaliation from Russia and raise gasoline prices. Ukrainian leaders are willing to take the risk.

(Extract from the eprcommunication press review)