Seaborne

EU bans Russian oil transported by sea to intensify changes in trade flows

The EU has agreed to ban imports of Russian oil by sea, accounting for more than two-thirds of Russian crude deliveries to the bloc, in a move that is expected to further reshape global energy flows and add to price pressures as buyers are looking for alternative supplies.

Brent futures for August rose 1.6%, or $1.92/bbl, to $119.51/bbl in mid-morning European trading after the announcement.

Prior to the EU decision, S&P Global Commodity Insights on May 27 predicted a loss of nearly 2 million b/d of crude and product supply from Moscow by the end of the year, while more and more buyers are avoiding Russian oil.

Below are the key factors to watch out for:

Prices
– Price discounts for Russian Urals crude have widened, many refiners have turned to other supplies.

• The Urals has traded at historic lows since the invasion of Ukraine, with some trades closing at a discount of almost $40/bbl to the Platts Dated crude oil benchmark Brant. The Urals-Med differential was valued at minus $34.9/bbl on May 30 by S&P Global Commodity Insights.

• In the 0.1% gas oil and ultra low sulfur diesel markets, from June 1, Platts valuations in North West Europe and the Mediterranean will reflect materials of non-Russian origin, while that a new assessment for all origins, including Russian materials, CIF NWE ULSD cargoes is also being initiated.

• CIF NWE ULSD cargoes were priced at a premium of $1.50/tonne to the first-month ICE LSGO futures contract on May 31, while CIF Med ULSD cargoes were priced at a premium of $39 /ton on May 31.

• Following the announcement of the EU ban, ICE low sulfur gas oil futures for the first month, currently in June, was trading around $1,268/mt by mid-morning on the 31st May, down from $1,195.50/mt at 4:30 p.m. London time on May 30.

— Middle Eastern grades could be the big winners, with supplies from the region well positioned to replace Russian barrels.

• Traders anticipate higher official selling prices from the Middle East to Europe as European refineries seek alternative sour barrels. Meanwhile, some Asian buyers snatched up Russian shipments due to steep discounts.

Trade flows
— Europe is heavily dependent on Russian oil, which means it will take time to diversify supply, but new dynamics are emerging.

• Ural is a medium acid crude that has been a staple for refiners in northwestern Europe and the Mediterranean. Before the invasion, Europe was particularly dependent on Russian oil and imported around 2.7 million b/d of crude and 1.5 million b/d of products, mainly diesel.

• Germany, Europe’s largest consumer of Russian energy and second largest buyer of Russian crude, has seen most of its refiners and oil importers turn away from Russian supplies in recent weeks, allowing the country to reduce its dependence on Screw Russian crude at 12% from imports of 35% before the invasion of Ukraine.

• West African crude is heading to Europe rather than India and China as Asian buyers snap up heavily discounted Russian barrels. Light and medium-sweet Nigerian crudes with high middle distillate yields are being scooped up by European refiners looking to maximize drawdowns and cash in record margins.

• Angolan rough, which generally depends on Chinese demand, is heading to Europe in larger volumes, often at deep discounts. Angola exported 318,000 bpd to Europe in April, its highest level since August 2016, according to shipment data from Kpler.

• Strong exports of U.S. Gulf Coast crude are expected to Europe in the coming months as the U.S. continues to release 180 million barrels into strategic stockpiles through October, adding 1, 3 million bpd of additional supply to the market from April to October, according to data from S&P Global.

— Replacing Russian diesel will be difficult and could add cost pressure to consumers.

• Self-sanction by European refiners and independent traders has already reduced maritime imports of crude oil, heavy fuel oil, vacuum gas oil and naphtha from the Russian Urals.

• Germany was buying most of its Russian Urals crude through the northern leg of the Druzhba pipeline system, which in recent years has transported around 1 million bpd of crude from Russian fields to central Europe .

• Before the war, 60% of European diesel imports came from Russia, a dependency that rises to 70% for North West Europe, while in the Mediterranean 25% of diesel imports came from Russia, according to data by Kpler.

• Exports of ultra-low sulfur diesel from Russia’s Baltic port of Primorsk in May were expected to fall 29.5% on the month to around 1.1 million tonnes.

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

• Landlocked Hungary, which depends about 60% on Russian oil imports, had previously opposed sanctions against Russian energy on the grounds that it needed Russian crude to supply its only refinery.

• The Hungarian Duna and Slovakian Slovnaft refineries, both owned by the Hungarian MOL, process crude mainly delivered via Druzhba. However, they can also be supplied with maritime 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 supplies are also shipped from Russia through the southern arm of the Druzhba pipeline, which crosses Belarus and Ukraine and continues to the Czech Republic. Slovakia, however, said it could meet most of its crude needs through increased use of the Adria pipeline, also known as JANAF.

Infrastructure
— The Druzhba pipeline is a key supply route for Russian oil to Europe.

• Ural crude is exported via the Druzhba pipeline, a branch of which crosses Ukraine, as well as via the seaports Primorsk and Ust Luga in the Gulf of Finland, and Novorossiysk on the Black Sea. Around 1 million bpd passed through the Druzhba system from Russia to Europe before the war.

• Ukraine ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern branch of the Druzhba.

— Displaced Russian crude oil is heading to Asia, primarily India, putting further strain on supply chains and limited pipeline infrastructure.

• Russia will become more dependent on customers in Asia. China was the biggest buyer of Russian crude before its latest round of COVID lockdowns dampened demand. India imported 836,000 bpd of Urals crude in April, compared to just 274,000 bpd and zero in March and February respectively, according to data from commodity intelligence firm Kpler.

• Russian maritime crude imports to Europe fell by around 600,000 b/d in March and April, compared to 3 million b/d in February, according to Kpler.

• Total shipments of Russian medium sour crude from the Urals forecast for May were 8.71 million tonnes, down 545,000 tonnes from April. On a barrel-per-day basis, combined Urals loadings in May were expected to be 199,058 bpd lower than April at 2.03 million bpd, using a conversion factor of 7, 23 barrels/mt.

• Imports of Russian ultra-low sulfur diesel into the UK are expected to fall 35% month-on-month to around 65,945 tonnes in May, and down 171% from May 2021, according to May 25 tanker tracking and loading data.
Source: Platts