After a brief hiatus, Ukraine resumed its drone attacks on Russian oil refineries in early July. These attacks, which drew significant attention in Western media this spring, were initially blamed for a potential rise in oil prices. However, attributing any price increases solely to these incidents is overly simplistic.
While the attacks have disrupted Russia's oil refineries, the country's exports of crude oil and petroleum products are once again on the rise.
But what impact could future attacks have? By examining geopolitical tensions in the Middle East, OPEC+ output cuts, and shifts in global oil demand, we can gain a more nuanced understanding of the forces shaping the current oil market landscape.
Since the beginning of the year, Ukraine has launched successful attacks on Russian oil refineries.
According to the International Energy Agency’s (IEA) April Oil Market report, 11 Russian refineries have been damaged by Ukrainian drone strikes. In July, Ukraine resumed these attacks, expanding the scope of its drone warfare.
Russian refineries play a vital role in supplying fuel to Russian troops stationed in occupied Ukrainian territory.
The disruption in fuel supply poses additional logistical challenges for Russian forces, reminiscent of the logistical hurdles that were among the key reasons for the hasty withdrawal of Russian troops from near Kyiv in March 2022.
Russia is attempting to control sensitive prices, particularly those of fuel. Such support for consumer prices simply adds additional pressure on the budget.
If this trend persists, Moscow will be compelled to increase oil-products subsidies in Russia out of federal coffers to mitigate the impact on the population.
Recovering the refinery’s capacity presents a formidable challenge to Russia due to energy sanctions, which not only curtail export revenue but also prohibit the supply of equipment crucial for the oil industry.
Consequently, the Kremlin finds itself unable to swiftly restore production, exacerbating the challenges posed by the disruptions in its oil sector.
The prevailing notion that the recent surge in Ukrainian drone attacks on Russian oil refineries could disrupt global petroleum product markets appears largely unfounded.
While these drone strikes have attracted media attention and piqued interest within international organisations and national governments, their actual impact on global oil prices has been minimal.
In fact, ICE low sulfur gasoil futures have been unresponsive to resumed attacks in April.
The ongoing tensions in the Middle East, alongside the extension of output cuts by OPEC+ until June, coupled with a surge in global oil demand, form the cornerstone of this upward trajectory on the global oil market.
According to the latest Russian Oil Tracker by the KSE Institute, Russian oil exports saw only a slight decrease to 7.7 mb/d in May.
IEA data proves the point: in March-May 2024 Russia noticeably increased crude exports — by 200-400 kb/d vs. February.
The notion that Ukrainian drone strikes could significantly disrupt global oil markets disregards vital nuances. Russia’s contribution to the global gasoline supply stands at a mere 0.7 percent of the total oil supply.
Even with the subsequent ban on gasoline exports by the Russian government, the expected impact on global prices remains minimal, given the ease with which other suppliers can fill the void.
Conversely, Moscow’s role in the global diesel market is more substantial, accounting for over seven percent of total world diesel supply, as per data from Kpler and the IEA.
Although a sharp decline in Russian diesel exports may temporarily drive up refinery margins and pump prices, this effect is expected to be transitory. Increased refinery activities in countries like India, Turkey, and the Middle East are poised to mitigate any disruptions in Russian diesel supply.
Any potential reduction in Russian oil product exports is likely to be offset by increased deliveries of Urals crude oil, as indicated by March-May data.
On the contrary to any potential reduction due to successful Ukrainian drone attacks, in May 2024, Russian oil products seaborne exports were 17 percent higher month-on-month.
In response to the perceived threat posed by Ukrainian drone attacks, the Russian government reintroduced a six-month ban on the export of gasoline, effective from March.
Additionally, refineries were mandated to increase the proportion of diesel fuel sold on the stock exchange from 12.5 percent to 16 percent of the total volume.
However, by the end of May, the Russian government has temporarily lifted its ban on gasoline exports to avoid overstocking at refineries as domestic supplies have met demand.
By the end of June, Russia mostly restored damaged by drone attacks capacities, while Ukraine refocused drone attacks from refineries to oil depots close to the frontline.
In a broader geopolitical context, the repercussions of Russia’s response extend beyond its borders. Russia has historically used energy as a tool for exerting pressure, but now the tables have turned.
The traditional exporter is now forced to import petroleum products to meet its domestic demand.
This reliance on neighbouring countries for fuel imports underscores the vulnerabilities exposed by the drone attacks.
Recent trends in the oil and gasoline markets over the past few weeks indicate a consistent decline in prices.
This suggests that Ukrainian drone attacks on Russian refineries back in the spring 2024 do not wield influence over global markets.
However, the Ukrainian ‘drone’ strategy is forcing the Russian regime to make difficult policy decisions, increasing the overall cost of war.
Borys Dodonov is the head of the Center for Energy and Climate Studies at the KSE Institute, a think tank of the Kyiv School of Economics.
Borys Dodonov is the head of the Center for Energy and Climate Studies at the KSE Institute, a think tank of the Kyiv School of Economics.