Russia-Ukraine war could wipe out 1M barrels per day of oil demand

By Firdevs Yuksel

ISTANBUL (AA) - The impact of the Russia-Ukraine war on global oil markets could result in the removal of as much as 1 million barrels per day (bpd) of oil demand from the global market, according to Rystad Energy’s research on Wednesday.

Oil demand in both Ukraine and Russia is set to plunge if an end to the conflict does not materialize quickly, the Norway-based independent energy research and consulting firm said.

Ukraine is likely to see the largest drop in relative terms, potentially losing more than 50% of demand as long as the war persists, with long-term implications inevitable due to infrastructure damage and the speed of getting facilities back online once the conflict comes to an end.

According to the research, Russia also stands to suffer significantly, although the impact in relative terms will be less.

The direct and indirect sanctions imposed by the West on Russia's financial system are expected to reduce economic activity significantly, complicating the process for Russian companies in conducting business internationally and for its citizens to travel abroad. Overall, it could result in 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 sweeping, both for Russia and Ukraine, and the region's oil demand is going to take a severe hit if the conflict is prolonged and recently enacted sanctions remain in place," Sofia Guidi Di Sante, Rystad Energy's oil market analyst, was quoted as saying.

- Fall in road and air traffic will shave off 65,000 daily barrels of demand in Ukraine

Total oil demand in Ukraine averaged around 260,000 bpd in 2019. The road transport sector accounted for more than half of this total at 138,000 bpd, while the aviation sector’s demand is estimated at 7,000 bpd, representing only 5% of total consumption.

"As airports closed and flights were grounded, aviation demand was wiped out almost immediately. However, road traffic has remained high, sustained by heavy traffic as residents drive out of the country. The spike in traffic to the border compensates for the fall in commutes elsewhere and other regular activities," the firm said.

Rystad Energy further predicted that if the war drags on and fighting continues, demand could fall by 50% or more. Such a drop in road and air traffic alone would shave off around 65,000 bpd of oil demand, corresponding to 28% of the forecast monthly oil consumption of the country.

According to the agency, disruptions in the supply chain and the impact on gross domestic product (GDP) growth would harm other sectors, factoring in a potential additional estimated impact of 40,000 bpd.

"This would amount to about 50% of Ukraine's oil demand, an estimate aligned with the demand drop witnessed in other countries that have in recent years suffered from military conflict or unrest, such as Syria and Yemen," the agency said.

"The international response to Russia's actions has been swift and powerful. Financial markets are volatile as a result, and it will not take long for the trickle-down effects of sanctions to take hold of the country's economy. Russia is the sixth-largest oil consumer globally, with oil demand totaling 3.6 million bpd in 2019, and a slowdown in consumption would have severe domestic and international consequences, affecting global balances," it said.

According to the research, a complete halt in international travel would wipe out 54% of the country's total jet fuel demand, amounting to a negative impact of around 110,000 bpd as international travel demand is expected to drop swiftly in the coming days after the European Union and Canada's closure of their airspace to Russian planes.

"Although it is too early to estimate the impact of international sanctions against Russia on oil demand, we can gain an insight by considering the demand realities from countries with recent experience of similar sanctions – Iran and Venezuela," the research company said.

Oil demand dropped in these countries by a range of between 10% in Iran and more than 30% in Venezuela, with the extreme case of a 50% drop between the peak and trough in Venezuelan demand from 2011 to 2019.

- 10% to 30% drop in Russian demand would result in contraction of 350,000 to 1 million bpd in 2022

According to the agency, a 10% to 30% drop in Russian demand would correspond to a total contraction of between 350,000 and 1 million bpd in 2022. It expects that half of such a deceleration would be from industrial activities, while the rest would be driven by reduced internal mobility, although the agency said it is too early to make a sectoral assessment.