 A US ban, other financial measures and “self-sanctioning” by buyers severely affects Russia’s ability to export crude  Trade flows unlikely to adjust fully, leaving the market structurally tighter as long as the situation persists  Raising Brent prices to USD105/b in ‘22e, USD95/b in ‘23e There has not been a material drop in Russian oil production but in the past two weeks there has been a fundamental change in the market, as Russia’s seaborne exports have declined significantly. A US ban, financial and other measures taken against Russia, and widespread “self-sanctioning” by buyers for reputational reasons appears to have dramatically affected Western buyers’ willingness to buy Russian cargoes.

It is hard to see how this backdrop changes for the better without a significant easing of geopolitical tension. To some degree trade flows will adjust as non-OECD buyers increase imports in the coming months but even allowing for this, there’s a high risk that total Russian exports could remain a good 1-2mbd below previous levels (equivalent to 1-2% of global supply). The longer this persists, the more that field shut-ins are likely to affect Russia’s long-term oil production capacity.

OPEC’s dilemma: We had thought OPEC+ would halt the unwinding of its supply cuts by April/May to prevent oversupplying the market. If Russian losses persist, we expect the process to continue for longer. This in turn would lead to even scarcer remaining spare capacity – potentially little more than 2.0mbd by 3Q22e – which would do nothing to ease market concerns over the sustainability of global supply.

US supply looks set to respond to high prices. We have raised our forecasts, and expect 1.3mbd of “shale” supply growth in 2022e vs 1.1mbd previously, but further growth of ~1.1mbd in 2023e, up from our previous estimate of 0.6mbd.

The other area of “give” in the global system is demand. Russian demand is being directly hit, and could easily be down 0.5-1.0mbd at least this year. Beyond this, we are yet to see significant signs of the effects of price elasticity of demand.

SPRs – we need more, for longer. Even with higher US and OPEC supply we are probably facing another supply deficit in 2022 (we estimate it at 0.7mbd), exacerbating already-tight global inventories. The IEA has announced a co-ordinated release from Strategic Petroleum Reserves (SPRs), but more releases will have to be made on a much larger scale and over a more prolonged period to avoid further market tightness.

We raise our Brent price assumptions to USD105/b for 2022e (from USD84/b), USD95/b for 2023e (from USD76.5/b) and USD85/b for 2024e (from USD78/b), with the higher long-term assumption reflecting lower OPEC spare capacity and diminished Russian production capacity. It is impossible to rule out even higher prices than at present. If falls in Russian exports prove much larger than our expectations – either from a wider lack of buyers or from a cutback by Russia itself – the ability of the global system to compensate could be tested to its limits.