By Paul Hickin

The West's boycott of Russian barrels will be the oil market's ultimate test. While it has an impressive record of adapting to unthinkable shifts in trade patterns, from self-imposed embargoes on US exports to sanctions on Iranian and Venezuelan crude, the stakes, and costs, have never been higher. The market is already doing what it does best in bringing new buyers and sellers together and boosting existing relationships, but at a magnitude rarely seen before.

Russian oil supply makes up some 13 per cent of total oil exports. The EU alone was importing about 2.3 million b/d of Russian crude before the war in Ukraine, which started on February 24. Europe is now weaning itself off Russian Urals and buying more crude from across the Atlantic and via the Middle East.

Russia is now looking to Asia, with India emerging out of nowhere as a new top buyer of its heavily discounted crude, and lockdown-hit China is returning as a pivotal customer. The two Asian oil importers have now grown their share of Russian shipped crude to almost 30 per cent and 20 per cent, respectively, a combined growth of more than 1 million b/d from pre-war levels.

But the accounting ledger points to the extra ton-mile shipping costs and time involved bringing in barrels from further afield as even Brazil grades start to move up in popularity in Europe. These costs may be easily swallowed amid bumper refining margins, but European buyers are still at a competitive disadvantage to Asian refiners taking Urals, which could be at around a $40/b discount to Dated Brent, according to S&P Global Commodity Insights assessments.

The US' ability to throttle Iranian crude production by excluding it from the international financial system wiped out around 1.5 million b/d in output, but even then Iran has managed to find ways to sell its crude. It's much easier to weaponise oil when prices are low than when Dated Brent remains well into triple digits and shows little sign of falling. The more supply is cut from the market, the more consumers get twitchy and pump prices become politicised, so should Russian supply eventually plummet, buyers may start to scramble.

OPEC+ spare capacity is already down at dangerously low levels at a time when Libya output is volatile and US hurricane season is just around the corner. Russian seaborne exports are at three-year highs, but the difficulty comes in finding fungible grades should the market tighten further.

Analysts point to the door opening to an Iran oil deal, hanging in the balance for more than a year, should the pressure get too much. The oil market may already be paying the extra costs of epochal changes in oil flows, but the eventual price could be much higher.