How Asian customers win the oil game prize

Russia, Saudi Arabia, EU are losers

Sopuruchi Onwuka

Asian countries, mainly India and China, have become the prize winners in the ongoing trade sanction spat between the industrialized economies of Europe and world’s third biggest oil producer and war monger, Russia.

The Oracle Today reports that the Asian countries are taking full commercial advantage of the ongoing relegation of Russia into pariah state in the international community to position for greater share of the country’s crude oil exports.

Besides mopping up stranded Russian crude oil rejected in Europe, India and China have displaced significant volumes of costly Saudi Arabia cargoes with heavily discounted and premium Russian Ural grades of crude oil, thus gaining greater refinery yields and associated commercial margins.

International industry and market advisory firm, Rystad Energy, posted on Monday that the Russian Urals has seen a switch in flow from its traditional market of Europe to Asia almost four months after Russia’s invasion of Ukraine.

The firm reported that India, prompted by attractive margins, has since switched from its traditional staple of Middle Eastern grades and emerged as the significant importer of Russian Urals in the Asian region.

The European Union (EU) had on May 31 reached an agreement to ban seaborne oil imports from Russia into Europe.

The Oracle Today reports that following a slew of diplomatic and trade sanctions by 27 nation EU which forms the largest market for its oil, Russia has since gone rogue and sub-commercial with its crude oil exports; offering huge discounts and sailing its cargoes without maritime navigation signals to shield its customers and destinations.

The country has also been severed from the Europe controlled international financial network (SWIFT), making it difficult to raise bank credit lines for Russian transactions and also making it difficult for the country to make dollar earnings from its crude exports.

The world’s major industrialized nations including the United States, Canada, Japan, South Korea, Australia and the United States have jointly slammed a debilitating range of economic and trade sanctions on Russia following its breach of international convention by violating the sovereignty of neighboring Ukraine in a military invasion that has resulted in the prevailing war and associated humanitarian crisis in Europe.

Since the start of the war, based on the average of March to May 2022, Indian imports of Urals crude have picked up by 658% compared to 2021 levels, while for China the increase is 205% and for Asia as a whole 347%, Rystad Energy research shows. 

With Urals having a similar profile to Middle Eastern oil grades and advantageous lower sulfur content, Indian refiners have swapped Middle Eastern crudes in favor of Urals for their refinery processing.

So long as the Urals discount is maintained, it will have a huge margin advantage over alternative crude grades, meaning Indian refiners are likely to maximize Urals imports.

Since European refiners started shunning Russian oil in late February, Russian crude oil imports to Europe saw a drop of 554,000 barrels per day (bpd) from 2.04 million bpd to 1.49 million bpd between March and May.

Russian-origin oil imports by Asian refiners including China saw a corresponding 503,000-bpd increase from the January-February 2022 average of 1.14 million bpd to a March-May average of 1.517 million bpd.

Chinese oil firms have taken advantage of the prevailing 30 percent discount on Russian Urals to snapping up cheaper supplies as Moscow struggles to break into Saudi Arabia’s market enclaves to secure new export destinations.

While global crude prices have soared well above $100 per barrel, Russian auctions its oil at up to 30 percent discount, prompting China to boost Russian oil imports to 8.42 million tons.

In February, oil prices surged above $100 per barrel for the first time since 2014 on the back of Russia’s invasion of Ukraine. Brent crude futures were trading at more than $112 per barrel on Monday.

Urals is usually traded at a discount to Brent crude. A year earlier, the price difference was around $1.50, according to Neste; but the gap between the price of the two products is reported to have widened drastically since Russia invaded Ukraine in late February.

According to data from Finnish fuel refiner Neste, Urals was priced, on average, at $33.63 less than Brent over the five days to Monday.

In May, Reuters reported that the spot price of Russian oil was around $29 less per barrel than it was before the invasion of Ukraine and well below the price of oil from the Middle East, Africa, the U.S. and Europe.

Between mid-April and mid-May, the price of Urals averaged $73.24 a barrel, according to Bloomberg, making it almost a third cheaper than Brent crude futures over the same period.

Data from Beijing revealed that China’s $7.5 billion crude imports from Russia jumped 55 percent compared to a year earlier to around two million barrels per day after Beijing ramped up purchases at a steep discount and dumped significant volumes of Saudi offer.

Asia-directed exports will increase. More recently, we have seen low amounts – about 200,000 bpd – of Russian crude flow to Africa in June and this may also strengthen in the coming months.  

The expectation that Russian crude would cease to be traded on international markets has not transpired, and instead the steep discount on Russian crude has seen vessels redirected to alternative markets.

While the cost of financing these vessels and trades has increased significantly due to be freezing out of the Western financial system, the discount on Urals is too attractive for some refiners to ignore.

And in the paradox of the trade dispute, products from Russian crude oil refined at Indian and Chinese refineries are almost certainly exported to European markets at prevailing international benchmark rates for low sulfur fuels.

“As with Iranian oil in the past, once Russian crude is refined, it will become almost impossible to distinguish between those barrels and others as they re-enter the international market.” Rystad reported.

“Historically, India has taken very little Russian oil but the war in Ukraine and Russian-origin oil embargoes by the Europe Union (EU) have led to a rebalancing in oil trade flows, with Russian-origin crude oil being diverted away from Europe towards India and China instead.

According to the company, discounts of Russian-origin crude oil have to remain high to provide a compelling refining margin on top of offsetting the high insurance and freight costs associated with purchasing and shipping Russian-origin crude oil.

“For now, it is just pure economics that Indian and Chinese refiners are importing more Russian-origin crude oil for processing as such oil is cheap and offers one of the highest crude refining margins compared to other crude grades.

“Tracking what happens to Russian crude will be a challenge – Europe may end up importing petrol, diesel and other products from India that are blended with Russian Urals,” says Wei Cheong Ho, vice president, downstream at Rystad Energy,“ Rystad stated.