- The current oil market climate is complex, to say the least.
- Europe is preparing to enact its embargo on Russian oil and refiners are scrambling for alternatives.
- Many searching for new sources of crude have landed on Middle Eastern producers as a potential alternative.
While the world has slapped a wide variety of sanctions on Russia in the wake of Vladmir Putin’s illegal invasion and partial annexation of Ukraine, most of them have been relatively toothless. To hit Russia where it hurts, the world has to stop buying energy from the oil and gas titan. But slapping energy sanctions on the Kremlin while Europe was dependent on Russian oil and gas to keep the lights on would have been a pyrrhic victory at best. Finally, Europe is in a position to start getting serious about energy sanctions, but securing enough extra energy supply to replace Russian imports will be no easy feat.
Indeed, as Europe has inched closer to easing its energy dependence on Russia and has ramped up its sanctions on Russian energy bit by bit, the Kremlin has hit back hard, and European markets are still reeling. In early September when G7 countries agreed to impose a price cap on Russian oil, Russia responded by shutting off the flow of gas through the Nord Stream 1 pipeline completely within a matter of hours, citing suspiciously timed maintenance.
While this overnight loss of crucial energy supplies worsened an already dire energy crisis in Europe, it also galvanized the development of new energy sources and trading partners. In fact, while Europe’s energy crisis remains serious, it has not been as devastating as many experts predicted. Energy demand has fallen in response to skyrocketing prices, and alternative energies have risen to the occasion. As part of the effort to replace Russian energy imports, 18 out of 27 countries in the European Union set new records for solar power generation this year. In the wake of these developments, Europe is ready to throw down the gauntlet. In less than a month European Union nations will no longer be legally allowed to purchase seaborne cargo from Russia as the bloc continues to ramp up sanctions against the Kremlin.
While the boost in solar energy is hopeful news for Europe and for the climate, however, this added production capacity will only cover a fraction of the energy needed to fill the massive void left by Russia in Western energy markets. While the result will be an economic downturn for both the European Union and Russia, there will be a major winner: the Middle East. Already, oil refineries around the world are rushing to secure deals and guarantee supplies of crude oil from the Middle East for the coming year.
However, some of the refineries scrambling to secure term contracts may be denied their requests, as OPEC+ has already agreed to impose a major production cut, much to the West’s dismay. Starting this month, OPEC+ will cut production quotas by a whopping two million barrels per day. While the United States has publicly condemned the move, saying that the oil cartel is propping up Russia, OPEC nations had legitimate economic self-interest in propping up oil prices. Worried that a coming global recession and continued lockdowns in China will decrease oil demand, OPEC member nations are trying to protect themselves from next year’s potential losses.
As a result, oil importing countries are looking at a complex picture: on the one hand, global oil demand could fall considerably in the coming year; on the other hand, if Europe starts snapping up Middle East crude, it could lead to “intensifying competition for spot cargoes from the US, North Sea and even the Persian Gulf.” That’s according to World Oil, who report that Europe’s sudden interest in non-Russian oil could lead to difficulties for Asian importers. According to that report, “cargoes from the North Sea and Kazakhstan are also getting increasingly snapped up by Europeans, leaving fewer options for those Asian refiners that have shunned Russian barrels.”
All of this is to say that the outlook for oil markets in 2023 is complex, to say the least. Indeed, the current economy is throwing out all kinds of mixed messages and confusing indicators that have even top-level experts confused about which way the winds are blowing. With all this uncertainty in the air, it’s a tough climate for big energy decisions.