BY AMIN TIZKAR – INTERNATIONAL OIL MARKET NAVIGATROR AND ADVISOR

The ongoing conflict between Russia and Western nations has led to a serious of economic sanctions that are having far-reaching consequences for the global oil industry. As Russia’s isolation deepens, the impact on oil supply and demand is becoming increasingly pronounced. In this article, we will explore the effects of Russia’s sanction on oil market, examining the implications for procedures, consumers and the global economy as a whole.

I. SUPPLY SIDE IMPACT

I.I DECLINE IN RUSSIA’S OIL PRODUCTION AND ITS IMPACT ON OIL SUPPLY AND PRICES

According to the U.S. Energy Information Administration (EIA), Russia’s oil production has been declining since 2020, with a total decrease of 5% in 2022 compared to the previous year (EIA, 2023). This decline is primarily due to natural depletion of Russia’s mature oil fields, as well as a lack of investment in new projects due to sanctions and economic uncertainty (BP, 2022). The decline in Russia’s oil production has significant implications for the global oil market. As one of the world’s largest oil producers, Russia’s production decline reduces the global oil supply, leading to a tightening of the market. This, in turn, puts upward pressure on oil prices. In 2022, the global oil market experienced a supply deficit of 1.5 million barrels per day, largely due to Russia’s production decline (IEA, 2023).

The impact of Russia’s production decline on oil prices is clear. In 2022, the Brent crude oil price averaged $71.38 per barrel, up from $64.21 per barrel in 2021 (EIA, 2023). This increase in oil prices has significant consequences for consumers, businesses, and the global economy. Furthermore, the decline in Russia’s oil production has led to a shift in the global oil market. As Russia’s production declines, other producers such as Saudi Arabia and the United States are increasing their production to fill the gap (EIA, 2023). This shift has significant geopolitical implications, as the global oil market becomes increasingly dependent on a few key producers.

Despite the decline in Russia’s oil production, the country remains a key player in the global oil market. In 2022, Russia accounted for 12% of global oil production, making it the second-largest oil producer in the world (EIA, 2023). The impact of Russia’s production decline on the global economy is significant. Higher oil prices lead to increased inflation, reduced consumer spending, and slower economic growth (IMF, 2022). In addition, the shift in the global oil market has significant geopolitical implications, as countries become increasingly dependent on a few key producers.

I.II. THE IMPACT OF SANCTION ON RUSSIA’S OIL EXPORT COMMITMENTS

As a result of the sanctions, Russia has been forced to rely more heavily on its domestic market for oil sales. However, this has led to a decline in Russia’s oil export revenues, as domestic prices are lower than international prices (Russian Federal Customs Service, 2023). The impact of the sanctions on Russia’s oil export commitments has been felt across various regions. In Europe, Russia’s oil exports have declined by 15% since the sanctions were imposed (EIA, 2023). In Asia, Russia’s oil exports have declined by 10% over the same period (EIA, 2023).

Despite the challenges posed by the sanctions, Russia remains a key player in the global oil market. In 2022, Russia accounted for 12% of global oil production, making it the second-largest oil producer in the world (EIA, 2023). However, the sanctions have led to concerns about the long-term sustainability of Russia’s oil production. With declining investment and a lack of access to Western technology and expertise, Russia’s oil industry is facing significant challenges in maintaining its production levels.

The impact of the sanctions on Russia’s oil export commitments has also had geopolitical implications. As Russia’s oil exports decline, other producers such as Saudi Arabia and the United States are increasing their production to fill the gap (EIA, 2023). This shift has significant implications for global energy security and the balance of power in the energy market.

II. DEMAND SIDE IMPACT

II.I DECLINE IN RUSSIA ECONOMIC ACTIVITY AND REDUCTION IN OIL DEMANDS

Russia’s economy has been facing significant challenges in recent years, with a decline in economic activity and a reduction in oil demand. According to the World Bank, Russia’s GDP growth rate has been declining since 2020, with a contraction of 3.1% in 2022 (World Bank, 2023).

This decline in economic activity has been largely driven by the impact of sanctions, which have restricted Russia’s access to international markets and led to a decline in foreign investment (IMF, 2022). Additionally, the decline in oil prices has further exacerbated the economic challenges facing Russia, as oil exports account for a significant portion of the country’s revenue (EIA, 2023).

The reduction in oil demand has been particularly significant, with a decline of 5% in 2022 compared to the previous year (IEA, 2023). This decline has been driven by a combination of factors, including the impact of sanctions, the decline in economic activity, and the increasing competition from other energy sources such as natural gas and renewables (BP, 2022). The impact of the decline in economic activity and reduction in oil demand has been felt across various sectors of Russia’s economy. The country’s industrial production has declined by 4.5% in 2022, with a particularly significant decline in the manufacturing sector (Russian Federal State Statistics Service, 2023). Despite the challenges facing Russia’s economy, the country remains a key player in the global energy market. In 2022, Russia accounted for 12% of global oil production, making it the second-largest oil producer in the world (EIA, 2023).

However, the decline in economic activity and reduction in oil demand has led to concerns about the long-term sustainability of Russia’s oil production. With declining investment and a lack of access to Western technology and expertise, Russia’s oil industry is facing significant challenges in maintaining its production levels (Russian Central Bank, 2023). The impact of the decline in economic activity and reduction in oil demand has also had geopolitical implications. As Russia’s oil exports decline, other producers such as Saudi Arabia and the United States are increasing their production to fill the gap (EIA, 2023). This shift has significant implications for global energy security and the balance of power in the energy market.

II.II IMPACT ON GLOBAL OIL DEMANDS

The global demand for oil is expected to increase due to various factors, including a positive outlook for the US economy, increased demand for bunker fuel, and stronger economic growth in non-OECD countries such as China and India. Additionally, expansion in the Middle East and the US is also expected to contribute to the growth in oil demand. However, the rate of growth in global oil demand is expected to slow down in 2024 and 2025 due to factors such as efficiency gains, the adoption of electric vehicles, and a challenging economic environment. Despite this, the demand for oil is still expected to increase, reaching 104.3 million barrels per day in 2025, driven primarily by growth in non-OECD countries. This suggests that while the growth rate may slow down, the demand for oil is likely to continue increasing in the near future.

III. WHICH COUNTRY LEASDS THE WAY IN STABLIZING THE GLOBAL OIL MARKET: AN UNLIKELY ALLIANCE WITH RUSSIA

Saudi Arabia and Russia, two of the world’s largest oil producers, have been working together in recent years to stabilize the global oil market. This unlikely alliance has been instrumental in maintaining balance in the market, despite fluctuations in demand and geopolitical tensions. According to the U.S. Energy Information Administration (EIA), Saudi Arabia and Russia accounted for 13.6% and 12.7% of global oil production, respectively, in 2022. Their combined output was over 25 million barrels per day (mb/d), making them the two largest oil producers in the world. The OPEC+ alliance, which includes Saudi Arabia, Russia, and other oil-producing countries, has been instrumental in stabilizing the market. The alliance has implemented production cuts and other measures to ensure that supply and demand are balanced.

In 2022, the OPEC+ alliance agreed to cut production by 1.2 mb/d to address a supply glut and stabilize prices. This move was seen as a positive step towards maintaining market balance and supporting the global economy. Saudi Arabia has been increasing its oil production in recent years to meet growing demand. According to the EIA, the kingdom’s oil production rose by 1.3 mb/d from 2020 to 2022. This increase was largely driven by growing demand from Asia, particularly China and India. Russia has also been increasing its oil production, although at a slower rate than Saudi Arabia. The country’s oil production rose by 0.5 mb/d from 2020 to 2022, according to the EIA. Despite their differences, Saudi Arabia and Russia have found common ground in their efforts to stabilize the oil market. Their collaboration has been praised by other oil-producing countries and has helped to maintain balance in the market.

However, the alliance is not without its challenges. Geopolitical tensions between Saudi Arabia and Russia, particularly over conflicts in Syria and Yemen, have created tension in the relationship. Despite these challenges, the OPEC+ alliance has been successful in stabilizing the market. Oil prices have remained relatively stable in recent years, despite fluctuations in demand and geopolitical tensions. The alliance has also been successful in supporting the global economy. By maintaining balance in the oil market, the OPEC+ alliance has helped to support economic growth and stability. The unlikely alliance between Saudi Arabia and Russia has been instrumental in stabilizing the global oil market. Their collaboration has helped to maintain balance in the market, support economic growth, and ensure that supply and demand are balanced.

IV.THE FUTURE OUTLOOK FOR GLOBAL OIL PRICES

Global oil consumption is expected to experience a significant increase of 1.4 million barrels per day in 2024 and 1.2 million barrels per day in 2025, driven by robust economic growth and the persistent demand for petroleum products. The global oil market is anticipated to maintain a delicate balance, with the Brent crude oil price averaging $82 per barrel in 2024 and $79 per barrel in 2025, thanks to the concerted efforts of OPEC+ to restrain production and the expected growth in non-OPEC+ output.

OPEC+ production is forecasted to decrease by 0.9 million barrels per day in 2024 and increase by 0.8 million barrels per day in 2025, while non-OPEC+ production is expected to grow by 1.1 million barrels per day in 2024 and 0.8 million barrels per day in 2025. Global oil inventories are predicted to decrease by 0.9 million barrels per day in the second quarter of 2024, leading to upward pressure on oil prices, and increase by 0.4 million barrels per day in 2025, exerting downward pressure on prices.

The Brent crude oil spot price is expected to average $90 per barrel in the second quarter of 2024 and $89 per barrel for the year, before decreasing to an average of $86 per barrel in the fourth quarter of 2025. Geopolitical risks, such as attacks on commercial ships in the Red Sea and tensions in the region, are adding to the upward pressure on oil prices.

Global oil demand is expected to increase during the spring and summer driving seasons in the Northern Hemisphere, further fueling the upward pressure on prices. The expiration of OPEC+ voluntary production cuts in 2025 is expected to lead to an increase in oil production and downward pressure on prices. Despite the extension of OPEC+ output cuts through the first quarter of 2024, oil prices had fallen almost 40% from September’s highs to their lowest levels in six months by early December.

Analysts predict tighter oil markets in the first half of 2024, due to a looming surplus at the beginning of the year, driven by seasonally weaker demand, followed by a return to deficit in the second half of the year. This suggests that prices will experience an upward trend in the latter half of the year. Some experts anticipate that demand for fossil fuels will decline in the medium-to-long-term, leading to lower oil prices in 5-10 years’ time.

V. REFRENCES

BP (2022). Statistical Review of World Energy.

EIA (2023). International Energy Statistics.

IEA (2023). Oil Market Report.

IMF (2022). World Economic Outlook.

Russian Central Bank (2023). Foreign Investment in Russia’s Oil Sector.

Russian Federal Customs Service (2023). Russia’s Oil Export Data.

BP (2022). Statistical Review of World Energy.

Russian Federal State Statistics Service (2023). Russia’s Economic Indicators.

World Bank (2023). Russia’s Economic Outlook.

OPEC (2023). OPEC+ Alliance.