War in Ukraine could wipe out 1 million bpd of local oil demand

The war in Ukraine could suppress demand for oil from the world market by up to 1 million barrels per day (bpd), according to research by Rystad Energy.

The human and material costs of the conflict were catastrophic barely seven days after the start of the military operation. So far, Russia has shown no signs of backing down and the prospects for a breakthrough in the negotiations seem slim. As a result, investors and markets are scrambling to assess the ramifications of the deepening crisis as the West imposes even tougher sanctions on Russia, while institutions and businesses move away from Moscow.

Oil demand in Ukraine and Russia is expected to fall if the end of the conflict does not materialize soon. Ukraine is likely to experience the biggest decline in relative terms, potentially losing more than 50% of demand as long as the war persists, with inevitable long-term implications due to infrastructure damage and the speed with which installations will be brought back online once the conflict has arisen. to an end.

Russia is also likely to suffer significantly, although the impact in relative terms will be less. Direct and indirect sanctions imposed by the West on the Russian financial system will significantly reduce economic activity, making it difficult for Russian companies to do business internationally and for its citizens to travel abroad. This could lead to an oil demand destruction of between 15% and 30% or more.

“The economic fallout from the war – in addition to the humanitarian crisis – is going to be huge, for both Russia and Ukraine, and the region’s oil demand will be hit hard if the conflict continues and sanctions continue. recently enacted remain in place,” says Sofia Guidi Di Sante, oil market analyst at Rystad Energy.

Ukrainian perspectives

Total oil demand in Ukraine averaged around 260,000 bpd in 2019, with the road transport sector accounting for more than half of the total, at 138,000 bpd. Aeronautical demand is minimal, representing 5% of total consumption and estimated at 7,000 bpd in 2019.

Aviation demand was wiped out almost immediately as airports closed and flights were grounded. However, road traffic remained high, supported by heavy traffic as residents drive out of the country. The increase in traffic to the border compensates for the decline in travel to other destinations and other regular activities.

Yet if the war drags on and fighting continues, demand could fall by 50% or more. Such a drop in road and air traffic alone will reduce about 65,000 bpd of oil demand, or 28% of the country’s forecast monthly oil consumption. Additionally, supply chain disruptions and the impact on gross domestic product (GDP) growth would hurt other sectors, where we consider an additional potential impact estimated at 40,000 bpd.

That would account for around 50% of Ukraine’s oil demand, an estimate aligned with falling demand seen in other countries that have suffered military conflict or unrest in recent years, such as Syria and Yemen.

Perspectives from Russia

The international response to Russia’s actions has been swift and powerful. The financial markets are therefore volatile and it will not take long for the fallout from the sanctions to be felt on the country’s economy. Russia is the world’s sixth largest oil consumer, with oil demand totaling 3.6 million bpd in 2019, and a slowdown in consumption would have serious national and international consequences, affecting global balances.

The European Union (EU) and Canada have already closed their airspace to Russian planes, and demand for international travel is expected to fall rapidly in the coming days. A complete shutdown of international travel would wipe out 54% of the country’s total jet fuel demand, representing a negative impact of approximately 110,000 bpd.

While it is too early to estimate the impact of international sanctions against Russia on oil demand, we can gain some insight by looking at the demand realities of countries that have recently experienced similar sanctions – the Iran and Venezuela. Oil demand fell in these countries in a range between 10% (Iran) and more than 30% (Venezuela), with the extreme case of a 50% drop between peak and trough in Venezuelan demand for 2011 to 2019.

A 10-30% decline in Russian demand would correspond to a total contraction of 350,000 to 1 million bpd in 2022. We expect half of this deceleration to come from industrial activities, while the rest is due to internal mobility reduced, even if it is too early to make a sectoral assessment.

By Rystad Energy

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Steve R. Hansen