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Oil market not facing ‘acute supply emergency,’ analyst says

Eurasia Group Managing Director of Energy Climate Resources Raad Alkadiri joins Yahoo Finance Live to discuss Europe's energy supply after Russia shut off its gas pipeline, how China and India are navigating the conflict, and the outlook for oil demand and production.

Video Transcript

- Let's keep this conversation going with Raad Alkdadiri. He is Managing Director of Energy Climate Resources at Eurasia Group. Raad, good to talk to you today, a lot to parse through based on those headlines we got over from the EU. Let's start with that oil price cap, though. If it is really about easing the pain on consumers, how effective do you think something like this can be in keeping those prices capped?

RAAD ALKADIRI: It really does depend on what the price cap looks like, and, fundamentally, what punitive measures can be brought to bear. And the price cap on the oil side is really trying to get the OECD and industrial countries out of a bind. The EU, when it agreed to its sanctions package in June, decided to implement an insurance ban on cargoes from Russia, on seaborne cargoes from Russia.

And that's really what the oil price cap is designed to unwind. It's to link exemptions to that insurance ban by having countries agreeing to lower revenue. Now, ultimately, you've seen really, dislocations in Russian flows. And you've seen sort of adjustments in Russian flows over the last six months. So it depends on what Asia does.

And at the end of the day, whether two things. One, whether Asia can be convinced, and particularly China and India can be convinced to sign up to the plan. But more importantly, whether there are caveats made. If there are caveats made or Asian buyers are allowed to adjust their prices or simply align their prices, then the disruption to Russian crude may be fairly minimal. As I say, those flows have been readjusting for some time.

If there are more punitive measures brought in, and there are no signs of that right now, then you have much more significant volumes at play, conceivably 3 million barrels a day or more.

- On that key issue about whether these nations are likely to get buy in from China, you could add India to the mix as well. Have we seen the needle move in any meaningful way?

RAAD ALKADIRI: Not really, and you pointed to the two, sort of, key consumers. I mean, China is now taking about 1.2 million barrels a day of Russian crude. India has increased its intake of Russian crude from 30,000 barrels a day prior to the war to almost 900,000 in June. And the numbers still remain high.

They're both arguing that these are Western sanctions, they shouldn't be subject to it. And in India's case, and this is the critical one, it's seeking to remain neutral in this conflict. It is actually doing its damnedest, therefore, to negotiate carve outs. It's been talking to the EU since June about the insurance measures. And it's been engaged in intense discussions with the United States, similarly on how this might apply.

What the Indians have sort of hinted at is they don't mind having a price cap out there. It allows them to negotiate a lower price for the crude that they're already buying at a discount. But they don't want to do anything that's going to threaten their supplies. They certainly don't want to do anything that commits them to major sanctions.

- What does this all mean for capacity here in the US? You had the Energy Secretary reach out to, or at least urge, some of these oil refiners several weeks ago, urging them to really think about the exports, just given where capacity is in the US.

We've heard from the President's key energy advisor, Amos Hochstein, who said that there is no plan to tap into SPR even further. The reality is, in the fall, it really will be on the private sector to supply the market.

RAAD ALKADIRI: I think when you're looking at oil the key thing to keep in mind is that oil is fungible. It moves around. And actually, we haven't lost volumes in crude sense. We haven't lost major volumes from the market because of Russia. That's been the surprise over the last six months.

I mean, the apocalyptic forecast that came out immediately as the war started, that we were going to lose 3 million barrels a day of Russian supply, hasn't materialized. And you're seeing crude builds in the second quarter, third quarter, and probably fourth quarter of this year. So this is a market that's tight. But it's not a market that is facing acute supply emergency.

On the refining side, I mean, that's more of an indication of some of the impact that Russia's refined product exports have faced. But also just refining capacity, and the extent to which refining capacity has been hit over the last few years. So I think it's worth differentiating between crude oil and products in this one. And the administration has had a tendency to get the two mixed up when it's addressed this debate.

But looking forwards, again, if the oil price cap, fundamentally, is put in place and all it does is sanctify, or at least make official, the changes in flows that we're already seeing, then the market isn't going to be short crude. If it does start to be disruptive, if there are additional punitive measures, there. I mean, again, which hasn't been discussed.

But something like secondary sanctions to force the likes of India and China to abide by it, then you face a greater problem. But at the end of the day, I go back to my original point, which is what the US is doing, what the G7 is doing, is trying to get itself out of a bind. It wants its cake and it wants to eat it, too.

It wants to punish Russia on the crude side and on the energy side while not having to face the consequences and the price consequences in the midst of a global energy crisis that is only ballooning. And getting out of that bind may ultimately mean that the likes of China and India are allowed to buy Russian crude and that the disruptions will be minimal.

- Finally, Raad, you could argue natural gas, a much more critical issue for Europe, especially given that the Nord Stream pipeline is now shut down indefinitely. You had the Financial Times out this morning with a report saying, essentially, this hasn't really crippled Russia in a meaningful way, largely because the prices have increased so much. Even though they're supplying less, exporting less, they haven't necessarily pulled back, at least in terms of the revenue coming in.

How do you think that you should be thinking about this? If it really is about trying to bring Russia to its knees, so to speak, what is the alternative here?

RAAD ALKADIRI: Well, look, you can't impose financial pain on Russia without taking financial pain yourself in the form of higher prices. And I think if you look at EU imports of Russian energy, and remember, Russian energy exports to the EU is 80% of their overall gas exports. If you look at the gas markets, the EU has cut its imports by about 80%.

So while Russia may be benefiting from some higher prices, ultimately, from a strategic point of view, Europe is doing what it can to diversify away from Russia. And Russia is the loser in the medium to long term because of infrastructure issues. Russia has nowhere else to sell that gas.

And that, in part, is what you're seeing playing out in gas markets, is that's where the physical loss of Russian supplies is showing up. It's not showing up in oil. It's actually showing up in gas. And it's impacting prices accordingly. And LNG, in particular, is acting as a price transfer mechanism.

So you're seeing higher prices in the US. And you're seeing much higher prices in Asia. Regional markets that are normally distinct from each other are feeling the impacts and feeling the ripple effects because the crisis is so severe.

But in terms of what you do with Russia, it comes down to a political decision by those imposing sanctions to decide how much pain they are willing to inflict on their own consumers and their own markets.

- And that means more difficult decisions for consumers over in Europe as well as EU leaders. Moving ahead, Eurasia Group's Raad Alkadiri, always good to have you on the show. Appreciate the insight.