(Bloomberg) -- Russia’s oil output is set to fall roughly 20% by the start of next year as a European Union import ban comes into force, according to the International Energy Agency.
Gradual monthly declines will start as soon as this month as Russia cuts back refining, and will quicken as the embargo takes effect, the IEA said in a market report. The agency expects to see close to 2 million barrels a day shut in by the start of 2023, despite a healthy recovery in production in recent months.
The EU is set to halt most crude purchases from Russia from Dec. 5 in a bid to cut off revenue streams that the Kremlin uses to finance its war in Ukraine. From Feb. 5, an EU ban on Russian oil-product shipments takes effect.
Some 1 million barrels per day of Russian products and 1.3 million barrels per day of crude would have to find new homes due to the planned EU restrictions, according to the IEA estimates.
Russia’s oil output has risen in the past three months, reaching almost 10.8 million barrels a day in July amid higher domestic crude-processing and robust exports as the country redirects crude flows to Asia.
As western nations and their allies have imposed several waves of energy sanctions on Russia in relation for its invasion in Ukraine, the country has been successfully redirecting its crude supplies to Asia, away from the EU, historically its single-largest energy market. The Asia-Pacific buyers not constrained by the western restrictions have been willingly snapping Russian barrels that became cheaper due to the sanctions.
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In June, China for the first time overtook the EU to become the top market for Russia’s seaborne crude, the IEA data shows. The Asian nation imported 2.1 million barrels per day compared to the EU’s 1.8 million barrels per day, according to the report.
“July numbers for now are identical for the two regions, but China-bound volumes are likely to gain more as the “unknown” destination voyages are completed,” it said.
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However, Russia’s crude shipments to Asia have stabilized in the recent weeks, Bloomberg data shows, raising concerns over whether the region can sharply increase the imports further, offsetting the effects of the planned EU ban on Russian imports.
Russia’s oil output in the first three days of August averaged around 10.51 million barrels per day, according to data from the Energy Ministry’s CDU-TEK unit seen by Bloomberg.
That’s a decline of some 2.5% on July, yet so far it seems driven by seasonality, not by long-term factors such as sanctions. The bulk of cut barrels came from a group of smaller oil producers, which includes gas giant Gazprom PJSC, the data shows.
Gazprom has been actively cutting its gas output amid lower exports to the European Union. Because the producer pumps not only gas from its fields but also condensate, a type of light oil, the lower pipeline flows to Europe lead to a decline in Gazprom’s condensate volumes as well.
Yet as the producer raises its gas output ahead of the winter heating season, to meet higher domestic demand, its condensate output will likely rebound as well and Gazprom’s effects on Russia’s production may wane.
(Updates with IEA estimates from the fourth paragraph, Russia output data in the last four paragraphs)
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