Column: EU ban on Russian crude exacerbates global flows disruptions: Russell

The industrial facilities of PCK Oil Raffinerie are photographed in Schwedt/Oder. The company receives crude oil from Russia via Germany’s “Friendship” pipeline on May 9, 2022. REUTERS / Hannibal Hanschke

LAunceston, Australia, May 31 (Reuters) – The European Union’s decision to cut 90% of its oil imports from Russia will speed up a move already underway — that Moscow is trying to sell as much crude as possible to Asian buyers.

Russia is likely to find China and India particularly willing, with the former reopening much of its economy from strict COVID-free lockdowns and the latter seeking to bring down their very high energy import bill.

European Council President Charles Michel said in a tweet on Twitter at the conclusion of a two-day summit of 27 EU leaders that the European Union had agreed to end imports of seaborne crude from Russia. Read more

“This immediately covers more than two-thirds of oil imports from Russia, cutting off a huge source of financing for its war machine. Maximum pressure on Russia to end the war,” he said.

The remaining third of EU oil imports from Russia come through the Druzhba pipeline, but Poland and Germany aim to halt purchases by the end of the year, meaning the EU will halt 90% of all crude oil purchases from Russia.

News of the ban held Brent futures well, with the most active August contract rising to $118.80 a barrel in early trade, versus Monday’s close of $117.60.

Benchmark front-month futures are up 26% since hitting $96.93 a barrel on March 16, the lowest price since Russia invaded neighboring Ukraine on February 24, a move that sparked a raft of sanctions by Europe and other Western countries against it. Moscow.

So far, Russia has been able to export crude in quantities little changed from before the attack on Ukraine, with commodity consultants Kpler estimating that May exports will be the highest since October 2019.

Russia’s exports are expected to reach 5.09 million bpd in May, compared to 5.10 million bpd in October 2019.

The shift in buyers is already being noticed, as exports to China stabilized at 1.04 million barrels per day, up from 937,000 barrels per day in April, while shipments to India were scheduled to reach 853,000 barrels per day, down from 1.09 million barrels per day in April, but much higher. Pre-invasion levels were around 57,000 b/d just in January.

Kpler estimated seaborne exports to Europe at 2.23 million barrels per day, down from 2.42 million barrels per day in April and the lowest monthly total since July 2020, which was at the height of COVID-19 lockdowns.

RAW MERRY-GO-ROUND

The question for crude markets is how successful Russia will be in finding new buyers to replace customers in Europe, and even if it can find willing buyers, will it actually be able to ship crude oil on longer cruises from its ports in Europe to Asia.

Commodity analysts at JPMorgan said in a note dated May 25 that Russia could supply India with up to 900,000 barrels per day, if the government used the entire fleet of Sofcom Float tankers, but that it is likely to take the second largest oil importer in Asia in fact. About 500,000 barrels a day.

Analysts said the Indian tanker fleet could add another 500,000 barrels through the Suez Canal if it is fully mobilized to transport Russian crude.

JP Morgan said China’s Cosco could import 1.8 million barrels per day of Russian crude on the Saint Petersburg-Shanghai route.

However, these assumptions operate on the basis that India, China and Russia are using nearly all of their tanker capacity, something that is unlikely to happen in reality.

Most likely, China and India are boosting imports from Russia, but not enough to offset the loss of European imports.

Another question is how Europe can replace Russian crude, given that refiners will want to process oil of similar quality to Ural oil, the main grade currently supplied to Europe.

This limits the pool of suitable crude oil, and becomes even more limited if purchased on a spot basis.

Some grades of crude oil from Angola and Nigeria, as well as some from the Middle East have qualities similar to those of the Urals, which have an API gravity of 30.6 and a sulfur content of 1.48, making it a medium-acid oil.

The EU decision is likely to cause further disruption to global crude oil flows, and is also likely to increase freight and other costs and increase the security of supply concerns.

Edited by Himani Sarkar

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