Russia could increase domestic energy consumption and boost exports to new markets after some “unfriendly” countries rejected Russian oil. So says President Vladimir Putin. It sounds easy, but it will be very difficult in practice after the next wave of sanctions has started Moscow’s oil trade.
So far, there has been little impact on crude oil volumes coming from Russia’s export terminals. While sea shipments decreased during the first weeks after Russia’s invasion of Ukraine, there was no sudden collapse. And the rate of exports increased in the first week of April, partly due to the easing of storms in the Black Sea, leading to a backlog of ships waiting to be loaded at a major port.
What has changed, however, is where a lot of ships are heading. There has been a huge jump in the number of cargoes headed for Asia from the Black Sea, the Baltic and even, in one case, the Arctic port of Murmansk. Crude oil flows from Russia’s western ports to Asian countries in the first full week of April rose from zero in the weeks before the attack to 875,000 barrels per day. This is almost as much as the combined daily shipments by Russia to Germany, France, Greece, Italy and the UK before the invasion.
While Russian oil companies had to offer huge discounts of over $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-run oil refiners switch to privately negotiated deals for 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. Increased imports of Russian crude will displace purchases from elsewhere and buyers will be wary of damaging relationships with their traditional suppliers in the Middle East. This could put a cap on the quantity they are willing to take from Russia.
There is also the question of the chemical make-up of the crude. Every crude oil is different and refineries operate most profitably when they process a specific grade of crude oil, or a mixture of grades. The increased volumes of Russian crude would have to displace similar quality crudes in terms of their gravity and sulfur content, which could also limit the volumes refiners are able to take.
Increased crude oil inflows from ports in western Russia to India and China, perhaps offset by higher inflows of Persian Gulf crude to Europe, is also going to put pressure on tanker markets. With the greater distances involved, more ships would be tied for a longer period on each delivery. It takes three times as long to transport crude oil from the Russian port of Novorossiysk on the Black Sea to India’s Sikka as it takes to transport it to Trieste in Italy.
From the Baltic, which has become Russia’s primary outlet for westward shipments, the increase is even greater. Delivery of crude oil from Primorsk or Ust-Luga to Finland, Lithuania or Poland takes a day or two, and it takes about a week to ship it to the Netherlands or Germany. The journey to the west coast of India takes a month, to the east coast, even more. Given Russia’s pre-invasion mix of destinations for its Baltic Sea crude exports, a complete diversion of flows into India would require five to six times the number of ships normally used. Increased demand will drive prices up – good news for shipowners, but bad news for anyone who bears the transportation cost.
The increase is similar for shipments from Russia’s Arctic port of Murmansk. Most cargoes make the one week long trip to Rotterdam. One is now on a month-long journey to Paradip on India’s east coast. More may be forced to follow, as the EU begins to toughen its stance on Russian oil imports.
Where can Russia sell its crude?
One possibility lies in China’s strategic reserves, if it is willing to discount enough to make the cargo attractive to the country’s value-conscious buyers. It has also been suggested that Middle Eastern oil producers could buy cheaper Russian crude for processing at their foreign joint venture refineries, freeing up their own barrels for export. Big discounts can make this an attractive proposition; Volumes can be as high as 200,000 barrels a day.
But if Europe is serious about weaning itself from Russian crude, Moscow will have to find markets for much more than that. About 1.8 million barrels of Russian crude oil were shipped to European ports before the invasion of Ukraine.
Using more within Russia only makes sense if the country has something productive with it – this would require boosting industry, which seems impossible.
Increasing sales for Asian buyers, who show no hesitation in buying Russian crude, is a superficially attractive solution. But it’s going to be a lot more expensive for Russia than selling it to high-paying European buyers at its doorstep.
This story has been published without modification in text from a wire agency feed.