Kyiv’s growing ability to hit Russia where it hurts most is still an underpriced risk in energy markets. Ukrainian drones have already knocked out over a fifth of Russian refining capacity since strikes began in August, per Kpler data. But exports of crude oil, the Kremlin’s financial lifeline, have been left mostly intact. That may change.

The logic for Kyiv is straightforward. Despite Western curbs, Moscow has proved adept at redirecting barrels to markets like India and China. New measures such as U.S. President Donald Trump’s tariffs on India have struggled to choke volumes. Ukraine is therefore targeting Russia’s vast energy infrastructure directly. Already, attacks on refineries have forced Moscow to curtail exports of oil products such as gasoline and diesel as domestic shortages worsen. About 1.6 million barrels a day (mbd) of refining capacity was down in August from the usual 7.4 mbd, and the loss may have climbed to 2 mbd in September, according to industry monitor IIR.

Yet so far, the impact on oil prices has been muted since the step-up in attacks. That’s because even with shrinking refining capacity, Russia is still able to export crude oil – and may even have more to ship given its diminished ability to turn it into products. Russian seaborne crude exports are at their highest level since March, as the four-week moving average for September hit nearly 4 mbd, according to Kpler. That compares with 3.4 mbd in July.

Kyiv is unlikely to stop there. Hitting refineries will only affect products that made up roughly a quarter of Russian fossil fuel revenue in August, meaning Ukraine will also need to target crude exports in order to really dent Moscow’s finances. And it increasingly can reach the storage facilities and pumping stations that exports rely on. Long range drones, its own cruise missiles, as well as potential long-range Tomahawks supplied by the U.S. will help.

The oil industry may struggle to fill the void if Russia’s 5 million barrels of overall crude exports per day were to substantially shrink. After a reversal from the Organization of the Petroleum Exporting Countries (OPEC) on their output cuts, spare capacity within OPEC is getting thin: Saudi Arabia and the United Arab Emirates are the only producers able to step up. Their combined excess capacity is 3.2 mbd as of August, International Energy Agency data shows, enough to replace over 60% of Russia’s exports. Yet the fact OPEC is still pumping about 1 mbd below its agreed amount, as per IEA estimates, suggests it may struggle to raise output quickly.

U.S. shale producers could also fill some of the gap. But U.S. crude production, at 14 mbd in July, is already at a record, and drillers may need to see an increase to at least $70 per barrel to step up output. Given limited spare barrels, any sudden drop in Russian exports could catch the market off guard.
Source: Reuters