Russia could soon be forced to curtail crude oil production by 30%, subjecting the global economy to the biggest supply crisis in decades — that is, unless Saudi Arabia and other major energy exporters start pumping more.
The world's second-largest crude oil exporter could be forced to limit output by 3 million barrels per day in April, the International Energy Agency warned on Wednesday, as major oil companies, trading houses and shipping companies shun its exports and demand in Russia slumps. Russia was pumping about 10 million barrels of crude per day, and exporting about half of that, before it invaded Ukraine.
"The implications of a potential loss of Russian oil exports to global markets cannot be understated," the IEA said in its monthly report. The crisis could bring lasting changes to energy markets, it added.
Canada, the United States, the United Kingdom and Australia have banned imports of Russian oil, affecting roughly 13% of Russia's exports. But moves by major oil companies and global banks to stop dealing with Moscow following the invasion are forcing Russia to offer its crude at a huge discount.
Big Western oil companies have abandoned joint ventures and partnerships in Russia, and halted new projects. The European Union on Tuesday announced a ban on investment in Russia's energy industry.
The IEA, which monitors energy market trends for the world's richest nations, said that refiners are now scrambling to find alternative supply sources. They could be forced to reduce their activity just as global consumers are hit with higher gasoline prices.
So far, there's little sign of relief. Saudi Arabia and the United Arab Emirates are the only producers with significant spare capacity. Both countries are part of the 23-member OPEC+ coalition, which also includes Russia. OPEC+ has been increasing its collective output by a modest 400,000 barrels per day in recent months, but often fails to meet its own targets.
The UAE's ambassador to the United States said last week that his country supported pumping more, but other officials have since said it is committed to the OPEC+ agreement. Neither the UAE nor Saudi Arabia has so far shown a "willingness to tap into their reserves," according to the IEA.
"The long-running inability of the bloc to meet its agreed quotas, mostly due to technical issues and other capacity constraints, has already led to sharp draws in global inventories," the IEA said. If major producers do not change course and open the taps wider, global markets will be under supplied in the second and third quarters of 2022, the agency warned.
The West is trying to persuade Saudi Arabia and the UAE to change course. British Prime Minister Boris Johnson was visiting the Gulf Wednesday to discuss ways of increasing diplomatic and economic pressure on Russia with the leaders of both countries.
The UK government said in a statement that the leaders are expected to discuss "efforts to improve energy security and reduce volatility in energy and food prices."
Global energy markets have been extremely volatile in the wake of Russia's invasion.
Just over a week ago, Brent crude leaped above $139 per barrel. Analysts warned prices could touch $185, then $200 as traders shunned Russian oil, pushing inflation even higher and adding huge strain to the global economy.
But there's been a rapid reversal since then. Brent crude futures, the global benchmark, have cratered almost 30% from their peak. They settled below $100 per barrel for the first time this month after shedding another 6.5% on Tuesday.
The crisis could help drive huge changes in global energy markets.
Additional supply could eventually come online from Iran and Venezuela if the United States and its allies ease sanctions on the two countries. Talks over a nuclear deal with Iran appear to have stalled, but an agreement could still be reached.
Last week, the European Union outlined plans to slash gas imports from Russia this year by finding alternative suppliers, speeding up the shift to renewable energy, reducing consumption through energy efficiency improvements and extending the life of coal and nuclear power plants.
Saudi Arabia, meanwhile, is in talks with Beijing to price some of its oil sales in yuan, the Wall Street Journal reported on Tuesday. That would erode the US dollar's dominance in global energy markets and deepen Riyadh's ties in the east.