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Discounts Widen on Russian Oil

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Benchmark Brent is trading near 2022 lows and discounts for Russian Urals and Espo crudes have widened since an EU ban on Russian crude imports and G7 price cap took effect on Dec. 5. While many market factors are at work and it's premature to say these measures targeting Russia's oil revenues are working, the effects so far have largely defied expectations, as many analysts predicted supply disruptions and higher prices. Instead, Russia seems keen to sell at these prices and not shut in output, while some say the relatively high price cap level of $60 per barrel has reduced the supply disruption risk. It all helps big buyers of Russian oil like India and China get more leverage to negotiate lower prices with Moscow. Urals crude at Baltics ports this week was assessed at $45/bbl, a discount of more than $30 versus dated Brent — down from a steady $20 in recent weeks. Export grade Espo in Asia flipped to an $11/bbl discount to dated Brent from a premium of a few dollars earlier. Chinese buyers dominate the market for this East Siberian-Pacific Ocean grade. Before Russia invaded Ukraine in late February, Urals sold at a discount of about $2/bbl or so to dated Brent and Espo at a steady premium. Recent Russian crude exports have been at times 500,000 barrels per day higher than pre-war levels at around 5 million b/d, but were slipping ahead of the ban. Lower Russian refinery runs due to falling domestic demand and product exports have allowed producers to sell more crude abroad.

The only way Russia can convince Asia to buy an additional 2 million barrels per day of its crude that is no longer going to the EU is to make it cheaper. The price cap, pushed by the US, was meant to limit the impact of an EU shipping ban that said no tankers with EU links could carry Russian crude or products. Moscow rejects the West setting a fixed price at which it can sell its crude, since its other commodities could be next — but it also must consider its oil-dependent federal budget as it calculates its response. The US promoted the cap as it feared a collapse of Russian exports from the EU bans could hike global prices and politically sensitive US gasoline prices. Russian crude exports are still expected to slump by some 600,000 b/d over time, Energy Intelligence reckons, but the market can handle this loss, particularly with Opec-plus holding more spare capacity now. So far, Washington has been right about Moscow wanting to keep the oil flowing since it is the largest source of income for Moscow, both in domestic taxes and foreign sales. Since the shipping ban was announced, Russia has frantically started to assemble a fleet outside the Western sphere of finance and insurance. It thinks that its own Sovcomflot and tankers from China, Iran and other nations might have enough tonnage to bring the bulk of its crude to market without dealing with the cap.

There is another shoe to drop, however, and the market could react much differently when the EU ban on Russian product imports takes effect on Feb. 5. Unlike crude, buyers are not yet lining up for Russian products. Steeper discounts should ultimately trigger more non-EU appetite, but even if new buyers can be found for an estimated 1.1 million b/d in products, Russia might not have the fleet of smaller product tankers needed to bring it all to market. Ahead of the EU product ban, even discounts on Russian diesel exports have been widening as traders have been trying to aggressively push more Russian diesel into the market and sell while they can. Diesel discounts were seen at $12/ton this week, versus $6-$9/ton earlier. The bulk of the diesel is still going to Europe. From the 750,000 b/d of diesel exports from the Baltics, 650,000 b/d went to Europe. This helps Europe get through the winter and avoids diesel prices from spiking, but a gap might open once Russian diesel and other crucial export products like fuel oil or naphtha can’t find other buyers. Russia has lined up several alternative buyers, from Togo to Trinidad & Tobago, but they all take small volumes and eat up lots of tanker capacity because of the longer travel distances. The G7 will also set a price cap on products, and if the same rules apply as for crude, Western tankers could only be used if products are bought at or below the cap. That could be more problematic. As of now, Energy Intelligence expects Russia's product exports to drop by 600,000 b/d.

Topics:
Oil Prices, Sanctions, Crude Oil, Oil Products, Oil Supply, Ukraine Crisis
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