Azerbaijan to see strong demand for its crude as EU oil price cap on Russia kicks in

By Trend

EU approved price cap of $60 per barrel for Russia’s oil supplies, which came in force from December 5, has not yet shown its full impact.

The initial restriction concern only seaborne oil from Russia, while, from February 5, a cap on refined petroleum products will be set. However, the embargo does not apply to Russia’s oil imports coming to the EU through pipelines. The Druzhba oil pipeline exports still remain.

As Charles Michel, President of the European Council, said, the ban covers more than two-thirds of Russian oil imports coming into the bloc.

The International Energy Agency (IEA) in its latest market review said that, before the ban kicks in, the EU needs to switch an additional 1.3 million barrels per day of seaborne and pipeline volumes. At the same time, the IEA also predicts the cut of 1.4 million barrels per day in Russia’s oil production next year.

Thus, this price cap has created numerous uncertainties and logistical challenges for the global energy market.

As Allan Mustard, co-founder and co-head of the Trans-Caspian Resources energy startup, Former US Ambassador to Turkmenistan, told Trend, it remains to be seen whether price caps will have any impact at all.

“Speaking generally, embargoes disrupt normal trade flows, so naturally prices tend to rise. Bear in mind that the refined product embargo doesn’t take effect until February 5th. For the oil embargo, which took effect December 5th, it remains to be seen if this takes supply out of the market. There are alternatives that Russia may use, such as using “dark fleet” tankers, similar to how Iran and Venezuela have sold oil under sanction. If supply comes off the market, the impact on refined products will depend on whether alternative supplies come on the market (e.g., from OPEC or others) to make up for lost oil,” he said.

According to Mustard, there will be no impact on refining until we see an actual reduction in supply, which will reduce the use of refining.

“If that happens, I would expect prices to rise. This is about displacement in the market and the ability of other countries/companies to make up the difference, which is typical of embargoes,” he explained.

As for the impact on Azerbaijan’s oil exports, the ambassador pointed out that the demand for Azerbaijani crude will be stronger.

“This sequence of events justifies the far-sighted investment in the Baku-Tbilis-Ceyhan (BTC) pipeline and in the Southern Gas Corridor (SGC), and in my view justifies additional investment in similar infrastructure that will allow larger exports of Caspian Basin hydrocarbons to the West,” he said.

Mustard noted, that, although the deployment of renewable energy sources, which is also envisaged in Azerbaijan’s strategy for upcoming years, is fast, it will not be able to fully replace hydrocarbons for at least another thirty years, and Europe in the meantime doesn’t want either to freeze in the winter or shut down its industries.

Meanwhile, according to the State Customs Committee, almost 22,682,798 tons of crude oil and oil products worth $17.180 billion were exported from Azerbaijan from January through October 2022, compared to 23,800,444 tons ($11.220 billion) over the same period of 2021.

Thus, Azerbaijan's revenue from the export of crude oil and oil products increased by 53.1 percent year-on-year.

The share of crude oil and oil products in Azerbaijan's total exports in the reporting period amounted to 49.49 percent, compared to 66.59 percent a year earlier.