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Ukrainian attacks threaten long-term damage to Russia’s oil industry
Russian oil exports in November were the lowest in recent years as western sanctions and a wave of Ukrainian drone strikes disrupted tankers and export terminals. Analysts warn that if the pressure persists, Moscow could face deeper structural constraints on its ability to sell cheap oil to global markets.
Russian oil product exports totalled about 2mn barrels per day in November, 21 per cent below the 2016-2024 average for the month, according to Vortexa, the energy data provider. The month-on-month fall was driven first by US and UK sanctions announced in October on Lukoil and Rosneft, Russia’s two largest oil companies, and then exacerbated by a series of successful Ukrainian attacks on export infrastructure.
In late November, Ukrainian naval drones struck an oil shipping terminal in the Black Sea that handles Russian oil exports, causing significant damage, while two Russian-linked tankers were hit in a separate attack off the Turkish coast.
Giovanni Staunovo, oil sector analyst at UBS, said this was a sign that Kyiv’s strikes have shifted from refinery assets to export-focused facilities, a trend that could inflict longer-term damage if the attacks persist.
“We remain concerned that oil investors are still complacent and are underestimating the risks to supply,” he added.
Until recently, Moscow had been able to load and ship almost any volume it wanted, with the main obstacle being finding buyers willing to handle sanctioned barrels at steep discounts. But as the year closes, Ukrainian attacks threaten Russia’s ability to “bring every barrel they would like to sea”, said David Wech, chief economist at Vortexa.
These attacks increase the risk premiums of shipments, meaning Russian companies will have to pay more for tankers and insurers willing to operate in exposed waters, he said.
He added that the pressure comes on top of a tighter tanker market, with “an unprecedented amount of oil at sea”. The surge reflects the expansion of Russia’s so-called shadow fleet, vessels with opaque ownership used to circumvent western restrictions, as well as longer and more complex shipping routes as a result of the sanctions. The combination further limits the availability of suitable tankers and pushes logistics costs higher for Moscow.
Although Russian barrels still find homes in China and India, the combined effects of higher insurance costs, sanctions and physical damage to infrastructure could erode Russia’s profits, as it will still need to offer discounts to stay competitive.
“[A] discount has to be offered to the buyer to remain competitive . . . and then you have much, much higher logistical costs . . . than any other player in the market,” said Wech.
Tamas Varga, an analyst at PVM, said that Russia’s full-scale invasion of Ukraine in 2022 remains the “major oil price driver”, pushing macro factors such as US Federal Reserve decisions relatively into the background. Opec, meanwhile, has kept a conservative stance on production capacity.
While the crude market has been relatively stable due to market expectations of oversupply, European diesel prices have been far more sensitive to war-related events because of the region’s limited refinery capabilities.
In recent years, Europe has closed many uncompetitive refineries as part of its shift to renewable energy, leaving diesel markets increasingly exposed to external shocks.
The spread between diesel and Brent crude on the ICE Futures Europe exchange tumbled by about 30 per cent over the course of a week in late November, after seemingly promising signals around Ukraine-Russia peace discussions. The spread stood at $25 a barrel as of Monday.
“Subsequent volatility is alarming physical traders and reducing liquidity,” with less trading resulting in more volatility, said Amaar Khan of Argus Media. (Ryohtaroh Satoh)