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Russian Oil Exports Fall by One-Third

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Energy Intelligence estimates that Russian oil export flows have fallen by at least one-third — or some 2.5 million barrels per day — this week as a result of financial and shipping sanctions, combined with a general reluctance among buyers to risk taking Russian cargoes.

Roughly 1.5 million b/d of crude and 1 million b/d of refined products are not making it to market, according to this early assessment of shipping data and conversations with traders.

Russia normally exports 4.7 million b/d of crude and 2.8 million b/d of products, according to government data.

Of the crude exports, the 1.8 million b/d transported by key pipelines has not been impacted so far. That comprises 1 million b/d to Europe and 800,000 b/d to China.

But the rest — crude shipped mostly through ports in the Baltic Sea, the Black Sea and the port of Kozmino in Russia's Far East — has been struggling to find buyers.

Traders have been steering clear of Russian oil to ensure they can lift a cargo and pay for it without violating sanctions — or for reputational reasons amid widespread condemnation of Russia's invasion of Ukraine.

Buyer Beware

"You take something today, the rules change tomorrow, and then you're stuck with a cargo that can't move anywhere. And with a high oil price, the values of those cargoes are enormous," one trader said.

Brent crude broke above $110 per barrel on Wednesday as Russian troops intensified their attacks on major cities in Ukraine.

Premiums for spot crude hit historic highs of $18/bbl over crude for delivery in six months.

Crude oil exports from the Baltic ports, which typically end up in Western Europe, are holding up best and are running around 1 million b/d, tanker data shows.

Early March cargoes are ending up in the Netherlands, Sweden and Lithuania.

In European product markets, a trickle of diesel has been loading in the Baltic and some fuel oil in the Black Sea.

Espo crude has been struggling to find buyers in Asia. No crude has moved from Russia's Black Sea port of Novorossiysk, which typically supplies Romania, Bulgaria, Turkey, Greece and Italy.

Urals Tender Falls Flat

Russia's Urals crude is usually popular in Europe because of the short sailing time to European refineries, which are often designed to run this relatively heavy and sour grade.

Without immediate availability of Urals, however, traders are bidding up anything that is available.

The current state of the market is illustrated by the problems that Surgutneftegaz has been having with its sell tenders.

The Russian company usually offers large volumes of Urals via these tenders, which typically set the tone for spot Urals prices for the trading month ahead.

On Wednesday, however, for the third time in a row, Surgut's tender failed to attract any buyers for the 880,000 tons (6.4 million bbl) of March-loading Urals on offer.

In another example, independent trading house Trafigura offered a March-loading cargo of Urals on Tuesday at a steep discount of $18.60/bbl to dated Brent, but it found no takers.

Refiners May Shun Urals

Market talk indicates that refiners in Europe don't want to touch Urals. Traders said Finland's Neste and Sweden's Preem — usually two large buyers of the Russian blend — could potentially skip their purchases this month.

Portugal's Galp said on Wednesday it would eliminate "direct or indirect exposure to petroleum products either sourced in Russia or from Russian companies." Just prior to its statement, it had picked up a cargo of fuel oil from St. Petersburg.

"I think this is all self-sanctioning," a European trader said. "But this self-sanctioning will be here to stay for some time."

Other European refiners also have a considerable appetite for Urals under normal circumstances, data from analytics firm Kpler shows.

These include the Petromidia refinery in Constanta, Romania; Total's Normandy refinery in Le Havre; Socar's Star and Tupras' Izmit refineries in Turkey; and Eni/Kuwait Petroleum's Milazzo refinery in Sicily (see chart).

Risk-Reward Calculations

Early rounds of US and European sanctions have been designed to keep Russia's oil and gas flowing to try to stop prices from soaring even higher.

But they have had a similar, if more muted, effect to direct sanctions on energy exports, as they have made buyers reluctant to commit to purchases of Russian oil, in particular.

Oil companies "can be seen as the good guys for once," one source quipped.

Others suggested that traders are more concerned about losing money than damaging their reputation, and want to avoid getting stuck with an unsellable cargo.

Sources think that most Russian oil will now be lifted by the big trading houses, which have sufficient scale and leverage to ensure they can get the vessels and financing they need.

Unless direct sanctions are slapped on Russian oil, these trading houses should continue to move Russian oil to market.

"Vitol and Trafigura will not stop lifting," a source said. "Some of them may even have long-term pre-payments or financing arrangements linked to the offtake."

Traders Gunvor and Glencore and Russian state-controlled oil giant Rosneft have been actively trading cargoes loading in the first few days of March.

It's likely to take some time before Russian export flows recover to pre-crisis levels, as traders are worried that they could be hit with stiff penalties if they put a foot wrong in the current environment.

There was speculation before Russia sent its forces into Ukraine that it might cut off oil and gas flows to European countries if they tried to slow its advance. So far, Moscow has not shown any intention of doing this.

Topics:
Oil Trade, Oil Prices, Crude Oil, Oil Products, Oil Spot Markets, Sanctions, Military Conflict, Ukraine Crisis
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