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Europe Gorges on Russian Oil Ahead of Ban

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The European Union still has six months to go before its ban on Russian crude and refined product imports takes effect, but indications so far are that the continent isn’t rushing to replace Russian oil. After initial steps to limit crude imports shortly after Russia invaded Ukraine in late February, efforts to wean off Russian oil through self-sanctioning have stalled. In fact, shipping data show that Europe is currently buying even more Russian diesel and other products than it did last year. Crude volumes have reduced to 70% of 2021 volumes but are up from May. The EU imported 2.2 million barrels per day of Russian crude last year, including 1.4 million b/d via seaborne imports from Russia’s Baltic and Black Sea ports and the balance via the Druzhba pipeline. European refiners and traders responded to the outrage over Russia’s invasion of Ukraine by pledging to stop buying Russian spot crude and to not renew term contracts. But those pledges are not yet translating into steady import declines. Intake of Russian seaborne crude fell to 800,000 b/d in May – but the decline coincided with refinery maintenance schedules. Imports have bounced back to 1 million b/d so far in June, shipping data show. Druzhba flows have fallen by 150,000 b/d from last year to 675,000 b/d, but total EU imports of Russian crude remain a robust 1.7 million b/d in June. Russian product imports have proved even more troublesome. Volumes tallied 1.2 million b/d during the first three weeks of June, exceeding last year’s 1.1 million b/d average.

Despite Europe’s limited progress to date shunning Russian oil, the EU ban looms large over the global industry and will trigger a massive rerouting of trade flows over the coming months. The continent has already begun buying up hundreds of thousands of barrels per day of additional US and West African crude, as well as sourcing more from its own North Sea production. The far trickier task will be rearranging refined product flows in a market already desperately short refining capacity. European traders say they are reluctant to trade Russian diesel, and pricing firm Platts dropped Russian fuel from its ultra-low-sulfur diesel (ULSD) assessment on Jun. 1. But the discounts on offer have not incentivized an urgent scouting of alternatives. Europe’s diesel imports from the Mideast and Asia actually fell 25% between June and May as some cargoes were diverted to West Africa, and diesel flows from the US have failed to pick up the pace. A formal ban will of course force the issue next year, putting the US, the Mideast and India in line to be the go-to suppliers of additional diesel and jet fuel to Europe. But those supplies will come at a big premium. Physical Russian diesel supplies are available at a steep $90 per ton discount to non-Russian physical diesel supplies, even if both are priced well above the ICE gasoil contract in Europe. Shipping data show that the EU loaded up on 635,000 b/d of Russian diesel so far this month, above the roughly 500,000 b/d imported last year.

As Europe grapples with replacements, Russia is bouncing back from the initial shock of a US ban and Europe’s self-sanctioning. Moscow’s key trick is simple: offer discounts. Russian crude oil exports are higher than before the war, contrary to dire early forecasts. Domestic oil production is bouncing back — and so are product exports and domestic refinery runs. Sharply higher oil prices mean Moscow’s oil income is much higher than last year despite the discounts, giving Russia cover to get creative with ways to keep barrels flowing. Russia's crude output recovered to 9.75 million b/d during the first three weeks of June, up from a 9.1 million b/d low in April and just below its 10 million b/d prewar levels, Energy Intelligence calculates. Seaborne crude oil exports from the Baltic and Black Sea have been a steady 2 million b/d so far this month, some 300,000 b/d higher than before the war. The additional volumes, as well as the crude shunned by Europe, is heading to Asia at up to $40/bbl discounts. Product exports of 2 million b/d are down about 400,000 b/d versus prewar volumes, but new tricks are emerging. Sales of fuel oil to Opec-plus allies Saudi Arabia and the United Arab Emirates have begun. And the EU is now importing nearly 70,000 b/d from Estonia — a country that lacks a refinery. Estonia has become a fast-rising transit center for Russian products. The trade has not received the same public stigma since the products are shipped by a member of the EU.

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