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How the world oil market responds to the war in Ukraine and the threat of a global recession

Loading of an oil tanker. Photo: Nathan Laine / Bloomberg

Loading of an oil tanker. Photo: Nathan Laine / Bloomberg

The market price for oil is falling for the second day. According to ICE Futures Europe, September Brent crude futures (the earliest one) cost $113.5 a barrel on July 4. Today, on July 6, 12:40 PM Kyiv time, the price was already $103.9. Later deliveries are traded at even lower prices: October – $99.9, November – $96.5, December – $93.9, January – $91.7.


The American WTI benchmark shows similar dynamics.

Why is oil getting cheaper globally

Oil prices are influenced by the fear of a global recession, Reuters argues. An economic slowdown means a decrease in the consumption of any fuel and, accordingly, a decrease in demand. This assumption is supported by the fact that oil futures are now dropping along with the main US stock market indexes.

The prices are falling despite the remaining concerns about oil supply to the market, in particular, because of the strike of oil workers in Norway. It is expected to lower the production of oil and gas in the country by 89 thousand barrels of oil equivalent per day, according to the Norwegian energy company Equinor.

Positive and negative implications of the situation on the global oil market for Ukraine

The slumping of crude oil prices is beneficial for Ukraine. First, they impact the prices of petroleum products, which are now almost completely imported by Ukraine from European countries.

Second, lower prices will mean less revenue for Russia, which will therefore have less money to wage the war.

However, the global recession causing the prices to go down will result in a decline in business activity in many Western countries, and it will be harder for them to provide financial assistance for Ukraine.

Prospects for oil prices

The analysts’ opinions still vary greatly. Thus, Citigroup believes that the crude oil price can slump down to $65 a barrel before the end of the year in case of a recession and weakened demand.

Historical data shows that the demand for oil turns negative only in times of the worst global recessions, but oil prices fall in all recessions, as a report by Citigroup states. The authors compare the current situation in the energy market with the crises of the 1970s. In late May, the Head of the International Energy Agency said that the new energy crisis will probably be bigger and last longer than the crises of the 1970s and 1980s.

Meanwhile, in late June, JPMorgan supposed that the price would rise to a "stratospheric" $380 if Russia considerably curtails production in response to sanctions. The G7 countries are now discussing the mechanism to cap the price of Russian oil. In response, Moscow can lower its oil production by 5 million barrels a day without inflicting serious losses on its economy, JPMorgan says.

How sanctions against Russia can impact oil prices

The G7 countries are now exploring the feasibility of capping the prices of Russian oil. They’re considering a ban on maritime transportation if oil is sold at a price higher than the limit. The plan is to allow a shipper or an importer to obtain financial services (insurance and the shipping of oil) only if the oil price doesn’t exceed the set level.

The leaders of G7 task the relevant ministries with holding urgent discussions of these efforts and consultations with third countries and key stakeholders in the private sector.

The hardest part of the implementation of this initiative is to secure support from other oil-importing countries. Large Russian oil buyers include China and India, which are not G7 members and are now buying much oil from Russia because it is sold at a big discount ($30 to $35 a barrel). If only Europe, the US, and several more countries agree to cap the prices, Russian oil will go to the countries that will buy it for themselves or for resale, experts warn.

Reuters cited an anonymous source to report that G7 representatives have had "positive and productive" negotiations with Chinese and Indian authorities about capping the price of Russian oil, but the details are still unknown.

Iran can compete with Russia in the Chinese market

Iran has had to lower the price of its oil to compete with Russia in China. The supply of the cheap Russian Urals crude oil to China has surged to record levels in May, pushing Iranian exports aside. After this, Tehran doubled the discount on its oil, Bloomberg reported, citing the traders.

The discount on Iranian oil as compared to the Brent crude benchmark is $10 a barrel. Before the war in Ukraine started and sanctions were imposed on Russian oil, the discount had been $4 to $5.

The cheaper oil from Iran will have to compete with the Russian one that will be supplied to the Chinese market in August, as traders say.


As data from the Chinese General Administration of Customs shows, Russia has become the primary oil supplier to China, leaving Saudi Arabia behind. In May, the supplies increased by 55% from a year ago: during the month, Russia delivered 8.42 million tons of oil, or nearly 2 million barrels a day.

Dynamics of maritime oil shipments by Russia

The total flows of crude oil from Russian ports have increased by 23% from the previous week, having recovered the major part of the volume lost during the previous seven days, when shipments from the Baltic port of Primorsk were temporarily halted, told Bloomberg on July 4. However, volumes bound for Asia were down by more than 15% from the highs seen at the end of May.


In total, Russia’s maritime shipments returned to 3.67 million barrels a day, which is in line with the plateau level achieved since the start of April. Asian countries are still taking more than half of all the crude shipped from Russia, but that share is slipping. In the most recent four-week period, flows to Asia accounted for 52% of the total volume.

This figure includes volumes on tankers heading from Baltic and Black Sea ports to the Suez Canal, but it has lowered from 63% in April.

Shipments to China in the most recent four-week period averaged 887 thousand barrels a day, while flows to India averaged 641 thousand barrels a day. Those figures are expected to rise, once destinations become known for about 180 thousand barrels a day of crude on tankers yet to signal final discharge locations. Shipments to Asian countries other than China and India have virtually halted, with rare cargoes heading to Japan and South Korea from Pacific terminals.

Russia has already lost almost two-thirds of its market for seaborne crude oil in Northern Europe, and it’s only five months before the EU ban on imports of Russian oil becomes effective. The volume of supplies there has stabilized in a range between 400 thousand and 450 thousand barrels a day since the end of April. Most of that oil is going into storage tanks at Rotterdam, Netherlands.

Shipments of Russian crude oil to the Mediterranean soared after the invasion of Ukraine and remain at about 750 thousand barrels a day. Lukoil’s ISAB plant on the Italian island of Sicily is the primary buyer of Russian oil, and Turkey has also boosted purchases.

The Mediterranean picture is repeated in the Black Sea, again driven by increased shipments to a Lukoil-owned refinery in Bulgaria. Meanwhile, flows to Romania have little changed since the start of the year, and those to Bulgaria are 2.5 times as big as they were in January and early February. Combined shipments to Bulgaria and Romania have averaged about 300 thousand barrels a day since mid-April.


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