Gneiss: The wider implications of a ban on Russian oil

This week, Doug Rycroft, director at corporate finance advisory firm Gneiss Energy, spoke to NewsBase about the implications of banning Russian oil.

"As the conflict continues to rage in Ukraine, the EU has announced a further package of sanctions on Russian interests. The focus of the latest round of sanctions is a ban on oil imports from Russia. The ban will immediately impact 75% of Russian oil imports to Europe and, by the end of 2022, up to 90% of imported oil will be banned.

"In the grand scheme of things, the argument that buying Russian hydrocarbons is fuelling the Kremlin’s war machine seems quite a simple one to make and therefore banning that activity seems an obvious step. But what could be the wider consequences of this?

"Put simply, large parts of Europe are now in the market for a new oil supplier. And in a seller’s market, there is a strong possibility of a surge in demand leading to further price inflation on top of current soaring prices. Meanwhile, another consequence is that Urals blend has been trading at a ca. $35 per barrel discount to other similar medium sour blends. Currently those alternatives are trading at parity with most global benchmarks, e.g. Arab light is trading at ca.$113 per bbl.

"But that is not the only potential issue. Many refineries in Europe are configured for Urals blend – API gravity of 30.6 and a sulphur percentage of 1.48. So replacing this with oil sourced from elsewhere could potentially lead to expensive reconfiguration of refinery infrastructure.

"This combination of a global rebalancing of oil flows, increased commodity prices and expensive reconfiguration activity will undoubtedly lead to higher pricing for oil products, impacting all sectors. We are already seeing the effects of this in the US where refined product exports are soaring.

"So whilst the EU has made the obvious and correct moral decision, further consideration will be needed to mitigate the impacts on businesses and consumers, and, of course, the further burden this will place on our cost of living."

Doug Rycroft is a director at Gneiss Energy, a strategic and corporate finance advisory firm operating within the energy and natural resources sectors.