The United States is reaching out to Venezuela and Iran to boost global crude oil supplies amid sharply rising prices due to sanctions imposed on Russia over its invasion of Ukraine. We look at how these sanctions have disrupted supply and what steps the United States is taking to deal with the crisis.
How important is Russia in the global crude oil market?
Russia is the third largest producer of crude oil, behind America and Saudi Arabia, and the second largest exporter after the Suadis. Russia currently exports around 7.5 million barrels of crude oil per day. Experts noted that there would be no way to replace Russian crude oil exports if Moscow were removed from global supply through restrictions, and that such a move could push prices to a level record.
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Germany, however, has indicated that Europe is not considering a broader ban on Russian crude oil. Brent is currently trading at $111.3 a barrel, up 43% year-to-date. While the US has banned Russian oil and gas imports and the UK has announced it will phase out purchases by the end of 2022, there are currently no restrictions preventing other country to source crude from Moscow.
However, concerns about the impact of sanctions on Russia, including a move to block some banks from using the international payment system SWIFT, have raised concerns among buyers. Buyers are also worried about reputational damage from buying Russian crude and being seen helping fund its invasion of Ukraine. Oil major Shell apologized on Tuesday for buying Russian crude oil and immediately halted all spot purchases.
How does the United States plan to increase production from Iran and Venezuela?
The United States is currently trying to revive the 2015 Iran nuclear deal under which Tehran agreed to curb its nuclear program in exchange for easing economic sanctions that restrict oil exports.
However, the talks have stalled as Russia reportedly demanded a guarantee that Western sanctions against it would not impact the country’s economic ties with Iran. The United Kingdom, China, France and Germany are also parties to the negotiations, in addition to the United States and Russia.
Experts have noted that Iran could potentially increase its crude oil from around 1.5 million barrels per day to 4 million barrels per day within months. India halted oil imports from Tehran in mid-2019 and has publicly stated that it would support the easing of sanctions against Iran and Venezuela as it would like to have more options for sourcing oil . India currently imports about 85% of its crude oil needs.
The United States is also in talks with Venezuela to ease sanctions imposed in 2019. Venezuela has indicated it may increase crude oil production if restrictions are lifted.
Indian diplomats are also in talks with the United States to allow ONGC Videsh Ltd (OVL) to allow the company to receive oil shipments to settle loans to Venezuela’s state oil company PDVSA. An OVL spokesperson said the matter was pending with the US Office of Foreign Assets Control (OFAC) “for the lifting of sanctions aimed at lifting the cargo of oil from debt in order to realize the dividends. outstanding amounts of $412.82 million,” adding that a timeline for such approval was unpredictable.
Experts said U.S. efforts to increase supplies of crude oil from other sources acted as a directional signal to markets that Washington would work in the best interests of other countries.
“As US inflation hits 7.9%, a nearly four-decade high, the US cannot afford soaring fuel prices, adding to consumer misery. They will do everything to boost the supply of oil from all available sources, including currently sanctioned Iran and Venezuela (and so) will send a directional signal to the market and may help it calm down,” Debasish said. Mishra, partner at Deloitte India.
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