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Creative Financing Helps Sell Russian Crude in Asia

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Several Russian crude cargoes have traded in the Asian market in recent days, despite sanctions that have led to widespread wariness in the region and made it difficult to finance purchases of Russian oil.

Buyers of these crudes include China's independent refiners, while some Indian market players are also thought to have kept buying Russian crude.

Traders with Russian crude to sell in Asia have resorted to unusual ways of helping buyers to finance their purchases.

Some are believed to be offering open credit — something that Iran has done in the past to work around Western sanctions.

Chinese and Indian Buying

Chinese and Indian market players are continuing to buy Russian crude, including the major East Siberia-Pacific Ocean (Espo) export grade as well as Sokol and Sakhalin Blend, said an Asian trader.

These cargoes were bought from third parties — probably non-Russian sellers. And while some of the deals were done before the invasion of Ukraine, others were done afterwards, and all of them were denominated in US dollars, he added.

Chinese independents have bought Espo crude, with at least one or two deals done after the invasion, said two trading sources.

Many Asian market players are wary about Russian spot crude these days, especially if the sellers are Russian.

But some buyers appear to be less concerned about Russian spot cargoes that are held by non-Russian players that are looking to resell them.

Indian Oil Corp. (IOC), for instance, could continue to buy Russian crude on a delivered basis, while the Chinese are likely to keep buying Russian volumes, said a Northeast Asian refiner source.

To be clear, under normal circumstances, much of the Russian crude sold to Asia typically ends up in the hands of Chinese buyers.

But such purchases might have become more complicated recently as Chinese banks such as Bank of China (BOC) and the Industrial & Commercial Bank of China (ICBC) reportedly limit their financing of deals involving Russian commodities.

This applies in particular to US dollar-denominated letters of credit.

Creative Financing

With many banks unwilling to issue letters of credit for purchases of Russian crude, traders who bought spot cargoes earlier and are now looking to resell them have found themselves in a bind.

One trading source said that without letters of credit "anyone outside of China and India is going to find it hard" to trade Russian crude.

Consequently, traders stuck with cargoes of Russian crude are now resorting to providing open credit to buyers or persuading them to pre-pay for cargoes, said a trader.

This is a major departure from the usual practice of requiring buyers to present letters of credit.

Two market sources said that selling crude on open credit is much riskier for the seller.

"They don't have much choice," a trader said. "They either take that risk, or don't sell at all."

Independents Buy Espo

Around half of the Espo crude exported from Russia's Far Eastern port of Kozmino, near Vladivostok, is typically snapped up by traders, who then resell it to Chinese independent refiners and other buyers.

The independents typically prefer to buy Espo on a delivered basis and priced against ICE Brent futures — an extremely unusual practice in the Asian market.

Recently, some April-delivery Espo cargoes were sold to independents at a premium of more than $6.00/bbl over ICE Brent on a d.e.s. basis, said two traders, one of whom markets crude to the smaller independent "teapot" refiners.

That is equivalent to a premium of around $7.20/bbl over the Dubai benchmark price, they added.

Most of the April arrival-delivery Espo cargoes were sold to independents before Russia's invasion of Ukraine, but one or two were sold after it, a trader said.

Some of these independents might need sweeter crudes like Espo to blend with illicitly imported sanctioned Iranian sour volumes, he added.

It's unclear how recent independent buyers of Espo financed those deals, because few sellers would sell crude to teapots without proof of credit, the trader noted.

Some of the smaller teapots "are viewed as risky, [and] not financially strong or credible," he said.

There have been cases in the past of teapots walking away from previously agreed deals at the last minute, leaving traders stranded with the cargoes,

"That's why they got a bad rep and sellers will ask for LCs [letters of credit]," the trader said.

Topics:
Crude Oil, Oil Demand, Sanctions, Independent Refiners
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