November 9, 2022

WWW.ENERGYINTEL.COM

Russian Exports: War Reality Affects Crude, Products Differently


  • In October, Russian exports of crude oil, having surged in the months after the start of the war in Ukraine, touched the lowest point since that February watershed.
  • After a drop of 600,000 b/d in the wake of the war, Russia’s petroleum products exports have stabilized and in the third quarter were down only 100,000 b/d year on year.
  • After a steep two-month decline, diesel exports are poised to spike in November and reach prewar levels amid a buying spree in Europe.

Although its barrels have been labeled “toxic” and sanctioned widely, Russia, the world’s second-largest liquid fuels exporter after Saudi Arabia, has proven remarkably adept at marketing stranded volumes. Granted, this has occurred thanks to significant discounts, which have eroded value at a time when Russia needs budget income to fund the war and buttress an economy under stress.

Rising oil demand this year, both global and domestic, has helped support Russian crude exports. Exports of oil products, however, have not fared as well. So far this year the country has exported an average 2.6 million barrels per day of diesel, fuel oil and other products, compared to 2.8 million b/d in 2021, according to Energy Intelligence's calculations. Preliminary data for October suggest an uptick of about 100,000 b/d to 2.6 million b/d.

Created with Highcharts 9.0.0('000 bbl)('000 bbl)WAR DISCOUNT SPARKS RUSSIAN CRUDE EXPORTSTotal Crude ExportsTotal Product ExportsJan'21Feb'21Mar'21Apr'21May'21Jun'21Jul'21Aug'21Sep'21Oct'21Nov'21Dec'21Jan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'22Oct'2201,5003,0004,5006,00001,0002,0003,0004,000Source: Energy Intelligence

The last two months of 2022 should alter these trends. On the crude side, Rosneft is preparing to renew production — and exports — of Sokol grade from Sakhalin-1, which Exxon Mobil abandoned due to the war. At the same time, European buyers are expected to cease orders because of the Dec. 5 embargo. The G7, meanwhile, has mandated a price cap on all cargoes using Western maritime services. Cargoes loaded before Dec. 5 can be offloaded until Jan. 19 and will not be subject to the cap.

On the products side, deliveries abroad are poised to jump as Russia’s refiners boost throughput after September-October maintenance.

Gross Exports Slide

Since March, the first month the industry was directly affected by the war, total crude and product exports have averaged 7.5 million b/d. This is about 200,000 b/d less than the four months before the war, or November 2021-February 2022, when Russian production was under less restrictions pursuant to the Opec-plus agreement.

October exports are estimated at 7.3 million b/d, or about 100,000 b/d less than the average for the third quarter. Second-quarter exports, by contrast, were 7.7 million b/d as Russia succeeded in cranking up crude sales abroad to historic levels.

Over the past five months, the EU has whittled down offtakes of both crude and products from Russia.

Created with Highcharts 9.0.0('000 bbl)EU WEANS ITSELF OFF RUSSIAN IMPORTSCrudeProductsTotalYear 2021Jun'22Jul'22Aug'22Sep'22Oct'2201,0002,0003,0004,000Source: Kpler, Energy Intelligence

In terms of flows, the port of Kozmino in the Far East has seen an uptick in activity, with flows jumping 20% over the year to approximately 860,000 b/d in October, according to shipping data.

By contrast, Baltic Sea ports, located a great distance from key customers such as India and China, have seesawed: exports from this area have declined from 1.6 million b/d in April, a three-year high thanks to $40 per barrel discounts, to an estimated 1.25 million b/d in October. Still, this is the same level as October 2021.

Primorsk and Ust-Luga, the main outlets on the Baltic, will warrant close monitoring post-embargo given Russia’s need to ship volumes vast distances. Acknowledging this, Moscow has announced it may reduce freight rates for Russia-owed ships.

Naphtha Slips, Mazut Steadies

As part of a new database tracking Russia's exports, we separated the country's refining slate into 10 broad categories, ranging from liquid petroleum gases (LPGs) to petroleum coke. The largest exported product is diesel, followed by heavy fuel oil and naphtha.

Together these three accounted for two-thirds of all products exports last year. Russia, the world's third-largest refiner by capacity, produces them in great abundance — far more than the domestic market can absorb. It follows that, once the EU products embargo enters force in early 2023, the fate of Russia’s refining sector will depend on how oil companies succeed in finding alternate buyers for these three products.

Initial indications are that if the outlook for diesel is relatively hopeful given the tightness in global markets, naphtha and heavy fuel oil will pose a challenge.

Exports of naphtha, a favored feedstock for petrochemicals, fell some 70,000 b/d year on year to 450,000 b/d in April-September. Although after touching a low of 420,000 b/d in April, they rebounded to 470,000 b/d in September. Last year, Russia exported over 80% of its naphtha.

Created with Highcharts 9.0.0('000 bbl)RUSSIAN NAPHTHA OUTPUT/EXPORTSNaphtha OutputNaphtha ExportsNaphtha Domestic SupplyJan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'220200400600800Source: Energy Intelligence

Like naphtha, heavy fuel oil exports also plummeted after the onset of war but bounced back as Russian firms found new buyers in far-flung places like West Africa and the Middle East. Average exports of 620,000 b/d in the six months before the war dipped to 550,000 b/d in March-September.

In October, fuel oil began to stockpile in Russia — rising 750,000 barrels to 21.8 million bbl — although this is likely due to firms holding out in the hope of locking in a better price at the start of winter.

As refining runs are expected to grow in November, fuel oil production will increase in step given the industry’s low clean product yield, which was 63% in September.

Created with Highcharts 9.0.0('000 bbl)RUSSIAN HEAVY FUEL OIL OUTPUT/EXPORTSRefinery OutputDomestic Delivery TotalExportsJan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'2202004006008001,000Source: Energy Intelligence

Heavy fuel can be stuffed onto oil tankers, analysts say, but hauling such cheap, dirty products long distances — to West Africa or the Middle East — means oil companies will lose money hand over fist after discounts are factored in.

By contrast, mobilizing non-Western tankers, especially for light products like diesel and naphtha, will be a challenge. If unsuccessful, Russia will have to reduce refining runs and then either boost crude exports — exacerbating the tanker conundrum — or slash production.

End-of-Year Diesel Rally

In the first nine months of 2022, diesel exports averaged 700,000 b/d, compared to 840,000 b/d during the same period last year. In September, however, these exports posted a multiyear low of 580,000 b/d, and October shipments are estimated to be even lower, at around 525,000 b/d.

The decline in the past two months is primarily the result of refining turnarounds, although sources say the state has pressured oil companies to ramp up diesel reserves. Notably, from August to October, domestic stocks of diesel soared by 1.8 million bbl to 21.5 million bbl, a multiyear high.

Refiners could have been holding on to diesel since selling this product domestically yields a higher return thanks to an attractive subsidy. The war effort in Ukraine could also be a consideration.

By the second half of October, exports were growing rapidly, a trend that will persist in the last two months of the year, as well as in January 2023, as European traders buy as much as they can ahead of the February embargo. November diesel exports should balloon to around 750,000 b/d, according to a source familiar with the situation. This is over 200,000 b/d more than October levels and the highest since March, when sales abroad were 780,000 b/d.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >
Created with Highcharts 9.0.0('000 bbl)RUSSIAN DIESEL OUTPUT/EXPORTSRefinery OutputDomestic Delivery TotalExportsJan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'22Oct'2205001,0001,5002,000Source: Energy IntelligenceSep'22 Exports: 581



Gary Peach, New York