Russian oil: The next Russian fight for new markets for its oil

Russia may increase domestic energy consumption and boost exports to new markets after some “unfriendly” countries have rejected Russian oil. So says President Vladimir Putin. It sounds simple, but it will be much more difficult in practice once the next wave of restrictions on Moscow’s oil trade comes into force.

So far, there has been little apparent impact on the volume of crude flowing from Russia’s export terminals. Although seaborne shipments fell in the first weeks after the Russian invasion of Ukraine, there was no sudden collapse. And the rate of exports rose in the first week of April, due in part to easing storms in the Black Sea, causing a backlog of ships waiting to load at a key port.

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What has changed, however, is where many of those ships are headed. There has been a huge jump in the amount of cargo heading to Asia from Black Sea ports, the Baltic and even, in one case, the Arctic port of Murmansk. Crude flows to Asian countries from Russia’s western ports rose from zero in the weeks before the invasion to 875,000 barrels per day in the first full week of April. That’s almost as much as Russia’s combined daily shipments to Germany, France, Greece, Italy and the UK before the invasion.

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While Russian oil companies had to offer deep discounts of more than $30 a barrel to sell crude in Europe, they were not offering the same price cuts to buyers in India. However, that is likely to change as state-owned oil refiners switch to privately negotiated deals in search of better terms, rather than buying through public tenders.

But there is likely to be a limit to how much Indian refiners will buy from Russia. Rising imports of Russian crude will crowd out purchases from elsewhere and buyers are likely to be wary of damaging relations with their traditional suppliers in the Middle East. That may put a limit on the volume they are willing to take from Russia.

There is also the question of the chemical composition of the crude oil. Every crude oil is different and refiners operate most profitably when they process a specific grade of crude oil or a blend of grades. Larger volumes of Russian crude would have to displace crudes of similar quality, in terms of their gravity and sulfur content, which may also limit the volumes refiners can take.

Rising crude flows from ports in western Russia to India and China, perhaps offset by higher flows of crude from the Persian Gulf to Europe, will also put pressure on tanker markets. The greater distances involved will tie up more ships for longer periods on each delivery. It takes three times as long to transport a shipment of crude oil from the Russian Black Sea port of Novorossiysk to Sikka in India than it does to deliver it to Trieste in Italy.

From the Baltic, which has become Russia’s main outlet for westbound shipments, the increase is even higher. It takes a day or two to ship crude from Primorsk or Ust-Luga to Finland, Lithuania or Poland, and about a week to ship it to the Netherlands or Germany. A trip to the west coast of India takes a month, to the east coast – even longer. Given Russia’s pre-invasion mix of destinations for its Baltic Sea crude exports, a full diversion of flows to India would require five to six times as many ships as are normally used. The increase in demand will push up prices, which is good news for shipowners, but bad news for those who will have to absorb transport costs.

The increase is similar for shipments from the Russian Arctic port of Murmansk. Most shipments make a week-long journey to Rotterdam. One is now on a month-long trip to Paradip on the east coast of India. They may be forced to follow further as the EU begins to harden its stance on Russian oil imports.

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Where else could Russia sell its crude?

One possibility is to enter China’s strategic reserve, if it is willing to offer discounts big enough to make cargoes attractive to the country’s price-conscious buyers. There have even been suggestions that Middle Eastern oil producers could buy cheap Russian crude for processing at their joint-venture refineries abroad, freeing up more of their own barrels for export. Deep discounts could make that an attractive proposition; volumes can reach 200,000 barrels per day.

But if Europe is serious about ditching Russian crude, Moscow will have to find markets for much more than that. About 1.8 million barrels a day of Russian crude were shipped to European ports before the invasion of Ukraine.

Using more inside Russia only makes sense if the country has something productive to do with it; that will require boosting the industry, which seems unlikely.

Increasing sales to Asian buyers, who are not averse to buying Russian crude, is a superficially attractive solution. But it’s going to be much more expensive for Russia than selling to high-paying European buyers at their doorstep.

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