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EU's embargo will bruise Russia's oil industry, but for now it is doing fine

NEW YORK (NYTIMES) - The European Union's embargo on Russian oil will bite into the country's export of crude - a cornerstone of the nation's economy - but it may not do much damage until the restrictions actually kick in.

For now, analysts say, Russian oil production is proving resilient as European buyers and others snap up the opportunity to buy crude at a discount of around US$30 a barrel to Brent crude, the international standard.

Kpler, a firm that tracks petroleum shipping, estimates that Russian oil production actually edged up about 200,000 barrels a day in May, to 10.2 million barrels a day, compared with April.

Still, that was about 800,000 barrels a day below February levels. Kpler anticipates that the EU's embargo could cause Russian production to drop another 1 million barrels a day, or about 10 per cent, once the restrictions come into effect.

The downturn would contribute to what many analysts expect to be a broad erosion in Russia's energy industry in coming years, as major oil companies quit the country and sanctions curb imports of Western technology.

The recent uptick in production occurred as Russian refineries increased their output after regular maintenance and as buyers lost some of their wariness of handling Russian oil.

"Buyers have grown accustomed to dealing with Russian cargoes," said Viktor Katona, an analyst at Kpler. Russian exports to the EU by sea, for instance, fell by about 440,000 barrels a day from February to March, but have since held relatively steady at around 1.2 million barrels a day.

Italy has been a large buyer, taking about 400,000 barrels a day, although about one-quarter of that oil is shipped to Central Europe through Trieste. Kpler estimates that an average of about 600,000 barrels a day of oil flowed by pipeline from Russia in May to countries like Hungary, Slovakia, Poland and Germany.

Hungarian oil company MOL said this month that its profits from refining were "skyrocketing" because of the discount on Russian Urals crude. The Hungarian government has lobbied against sanctions on Russian oil, arguing that as a landlocked country it has little choice but to rely on piped shipments from Russia.

In the meantime, buyers are likely to stock up on cheap oil. India has come to Russia's rescue, buying more than 700,000 barrels a day in May.