EU's proposed ban on Russian crude likely to reshape global oil market
4th May 2022 14:02 GMT

EU plans announced May 4 to halt Russian oil imports by year-end is expected to reshape global energy flows and add to price pressure as buyers race to secure new supplies.

Brent crude futures rose by more than 4% in European trading after the announcement and stood at $109.48/b by 11:45 GMT.

The move, announced by European Commission President Ursula von der Leyen, is part of the latest round of sanctions to hit Moscow over its war in Ukraine. S&P Global Commodity Insights expects to see a loss of nearly 3 million b/d in crude and products exports from Moscow in the coming months, as more buyers shun Russian oil.

Below are key factors to watch:

 

Prices

-- Russian Urals crude price discounts have widened as many refiners have turned to other supplies.

  • Urals has been trading at record-lows in recent weeks, with some deals being done at discount of almost $40/b to the Platts Dated Brent crude oil benchmark.
  • The medium sour grade Urals was assessed at its lowest level ever relative to Dated Brent at minus $39.40/b CIF Rotterdam on April 29, according to S&P Global Commodity Insights’ Platts assessment.
  • The price of Russian Urals CIF Rotterdam averaged $69.89/b in April, according to Platts data. This compares with a monthly average of $104.40/b for the UK's Forties, which is similar in quality to Urals.
  • Platts assessed Urals at $71.48/b and Dated Brent at $106.13/b on May 3, S&P Global data showed. Urals was assessed at $90.72/b and Dated Brent at $100.48/b on Feb. 23 -- the day before Russia invaded Ukraine.
  • Cash differentials for CIF Northwest European Ultra Low Sulfur Diesel cargoes of open-origin have dropped in April, with a large portion of NWE supply typically sourced by Baltic Russian barrels. Value on March 29 was assessed at a premium of $60.75/mt above the front month ICE low sulfur gasoil futures contract, but by April 28, this value had fallen to a $3.75/mt discount to the new front month ICE LSGO contract, as competitive bids of open origin remained untraded in the Platts Market on Close.

 

-- Middle East grades could be the big winners with the region's supplies well positioned to replace Russian barrels.

 

  • Traders are anticipating a rise in Middle Eastern official selling prices bound for Europe in response to the cut in Russian oil purchases, as more European refineries seek alternative sour barrels.
  • Iraq’s Basrah Medium and Saudi Aramco nominations have become popular choices for European refineries as they seek suitable alternatives to medium sour Urals.

 

Trade flows

-- Europe is heavily reliant on Russian oil imports making it hard to diversify supply at short notice.

  • Urals is a medium sour crude that has been a staple for refiners in Northwest Europe and the Mediterranean. Europe is particularly dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d products, mostly diesel, before the Feb. 24 invasion.
  • Germany, Europe's largest consumer of Russian energy and second-largest buyer of Russian crude, has seen most of its refiners and oil importers switch away from Russian supplies in recent weeks, allowing the country to slash its dependence on Russian crude to 12% of its imports from 35% before the invasion of Ukraine.
  • Germany is trying to force the 230,000 b/d Rosneft-operated PCK refinery at Schwedt to replace its offtake of Russian crude via the Druzhba pipeline with alternative supplies transported from Germany's Baltic port of Rostock and Poland's Naftoport in Gdansk.

 

-- Replacing Russian diesel will be hard and could add to cost pressures for consumers.

 

  • Self-sanctioning by European refiners and independent traders have already slashed seaborne flows of Russia's Urals crude, heavy fuel oil, vacuum gasoil and naphtha into the region.
  • Germany buys most of its Russian Urals crude via the northern branch of the Druzhba pipeline system, which moves about 1 million b/d of crude from Russian fields to central Europe.
  • In recent months, 60% of European imports of diesel have come from Russia, a dependency that rises to 70% for Northwest Europe, while in the Mediterranean 25% of diesel imports come from Russia, according to Kpler data.
  • Exports of ultra low sulfur diesel from the Russian Baltic port of Primorsk are set to fall 29.5% on month to around 1.1 million mt in May, as Russian refiners reduce run rates amid downward pressure on margins, according to market participants April 29.

 

-- Some European countries may find it difficult to switch due to infrastructure constraints.

 

  • Hungary, which is about 60% import-dependent on Russian oil, has previously objected to sanctions on Russian energy.
  • Hungary’s Duna and Slovakia’s Slovnaft refineries, both owned by Hungary’s MOL, process crude predominantly delivered via Druzhba. However, they can also be supplied with seaborne crude via the Adria pipeline, which brings crude from the Omisalj terminal on the Croatian island of Krk.
  • About two-thirds of Slovakia's crude oil supplies are also shipped from Russia by the southern arm of the Druzhba pipeline, which runs through Belarus and Ukraine and continues after Slovakia to the Czech Republic. Slovakia has said, however, that it could meet most of its crude oil needs through increased use of the Adria pipeline, which is also known as JANAF.

 

 

Infrastructure

 

-- The Druzhba pipeline is a key supply route for Russia oil heading into Europe.

 

  • Urals crude is exported via the Druzhba pipeline, a branch of which runs through Ukraine, as well as via seaports Primorsk and Ust Luga on the Baltic Sea, and Novorossiisk on the Black Sea. Around 1 million b/d had been flowing through the Druzhba pipeline system from Russia to Europe before the war.
  • Ukraine ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern leg of the key 25 million mt/year Druzhba pipeline.

 

-- Displaced Russian crude is likely to head into Asia putting more constraints on supply chains and limited pipeline infrastructure.

 

  • Russia will become more reliant on Asia. China was the largest buyer of Russian crude before it was hit with a new round of Covid lockdowns. Meanwhile Russia exported 627,000 b/d of Urals crude to India in April compared to according to 274,000 b/d and zero in March and February respectively, according to data from commodity intelligence firm Kpler.
  • According to Kpler, Russian seaborne crude imports into Europe fell by around 600,000 b/d in March and April, from 3 million b/d in February.
  • The total shipments of Russia's medium sour Urals crude scheduled for May stand at 8.71 million mt, down 545,000 mt from April. The combined May loadings of Urals crude are scheduled to be 199,058 b/d lower than April at 2.03 million b/d, using a conversion factor of 7.23 barrels/mt.

 

 


Bunkerworld .,
4th May 2022 14:02 GMT