Sanctions on Russian oil: more feasible now than in 2014

At the beginning of 2014, the US was producing about 8 mmbpd of crude, not including natural gas liquids (NGLs). By the end of the year, crude production had surpassed 9,5 mmbpd. When the MH-17 flight was downed over Ukraine on July 17, 2014, US output stood at 8.8 to 8.9 mmbpd. By comparison, Russia’s crude and condensate output was 10.6 mmbpd in 2014, some 1.7 mmbpd above the US.

The picture is rather different now. Before the meltdown in March, the US was producing 12.7-12.8 mmbpd of crude. Russia’s output in 1q2020 was 11.3 mmbpd. Since then, Russia has cut output under the OPEC+ deal and US production has declined in response to the low oil prices. Russia will probably produce a little below 10 mmbpd from September through December, and the EIA is projecting US output during that period at 11 mmbpd on average.

On top of that, there’s about 5 mmboepd of NGLs to be produced in the US versus a much smaller amount in Russia – I’d guess less than 1 mmboepd.

More importantly, US output could go back to 13 mmbpd with the right price over six months to a year. That would be be more than 4 mmbpd above the July 2014 output and more than 2 mmbpd about the current daily production. That’s a rough estimate of America’s spare capacity.

Even more importantly perhaps, OPEC’s spare capacity is likely to stay above 5 mmbpd until the end of the year and in the 3.5-4.0 mmbpd range in 1q2021. In addition, there is still an enormous crude and products glut left over after the March-April demand disaster.

Against this background, sanctions against Russian oil exporters no longer look like a crazy move that would instantly send oil prices above $100/bbl. On March 21, when Brent stood at $27/bbl and WTI at $22/bbl, my thinking was simple:

[I]f President Trump became convinced that oil prices needed propping up, he could use his sanctioning power, say, against Russian exporters.

Now that WTI has added $20/bbl, rising to $42/bbl, this would be a weak rationale by itself. However, should Russia invade Belarus, the US and its allies should be able to punish it by reducing the amount of oil Russian can export by several million barrels per day. The Saudis, it seems, would welcome the chance to displace Russian oil in Europe. China may jump at the opportunity to stock up on deeply discounted Russian oil but would only lift a fraction of the sanctioned exports. That’s been the case with Iran, and Russia is a much larger producer.

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