Mideast would struggle to cover Russian oil loss

Saudi Arabia, Kuwait and Iraq would struggle to cover the shortfall in crude supply created by a blanket ban on Russian energy exports as they have already allocated their annual term supplies, according to sources close to the matter.

Although trading sources say the ensuing European energy crisis will probably steer officials in Brussels and Washington away from strict energy sector sanctions in the event of a Russian invasion of Ukraine, EU foreign ministers and the White House have been deliberating potential retaliatory measures against Moscow should it proceed with military action, and the US has hinted that Russian oil and gas could be included.

A blanket ban on Russian oil exports would severely curtail the availability of sour crude at a time when similar-quality supplies from Iran and Venezuela are also subject to sanctions. Russia exports up to 1.5mn b/d of Urals crude from Baltic Sea ports, another 400,000 b/d from the Black Sea terminal at Novorossiysk and up to 800,000 b/d by pipeline to central and eastern Europe.

Mideast Gulf producers have comparable quality crude, and Saudi Arabia's Saudi Aramco and Iraq's Somo operate term supply contracts in Europe. Kuwaiti counterpart KPC also sends some limited volumes to the region. But Mideast Gulf sources warn that these three companies would have little room to cover a spike in sour crude demand in Europe in the event of a total embargo on Russian oil, given that they have committed most of their 2022 supplies via term agreements.

Aramco, Somo and KPC typically negotiate their annual contracts between late October and early December in the year before loading. Contract volumes depend on producers' projections of their overall output and domestic requirements. Existing term customers can nominate crude in excess of their contracts, but approving such requests is at the discretion of Aramco, Somo and KPC. Vortexa data indicate that seaborne deliveries of Saudi, Kuwaiti and Iraqi crude to northwest Europe and the Mediterranean — including Iraqi exports marketed by the semi-autonomous Kurdistan Regional Government (KRG) — stood at a combined 932,000 b/d last year. All three have a much more significant foothold in Asia-Pacific.

Iraq, Kuwait and notably Saudi Arabia have spare production capacity that could be deployed. Their output, as well as Russia's, is currently restricted by the ongoing Opec+ output restraint agreement, but the group might reconsider the pace at which it increases production this year if sanctions are placed on Russian crude. Opec+ delegates acknowledge that the standoff over Ukraine may be contributing to the current oil price rally.

By Ruxandra Iordache