Over the weekend, we reported that oil exports of Russian ESPO-grade oil from the Pacific port of Kozmino had collapsed by more than 50% following the implementation of the western oil price cap.
Today we learn that it wasn't just Kozmino's ESPO output: according to Bloomberg's Julian Lee, all of Russia’s seaborne crude shipments collapsed in the first full week of G-7 sanctions targeting Moscow’s petroleum revenues, which, while bad news for the Kremlin's income statement is an even greater source of alarm for governments around the world seeking to avoid disruption to the nation’s giant export program.
As Lee reports, some of the plunge was exaggerated by work at a port in the Baltic that’s now finished, but there also is the previously reported shortage of ship owners willing to carry key cargoes from Kozmino, while several other ports also showed week-on-week declines.
Combining everything, the first full week after the EU ban on seaborne Russian crude imports came into effect, total volumes shipped from the nation dropped by 1.86 million barrels a day, or 54%, to 1.6 million. A less volatile four-week average also plunged, setting a new low for the year. Baltic Sea volumes should recover with work now ended, but the issues in the East may take longer to solve.
As an aside, BBG warns that the data must be treated carefully, because weekly flows are at the mercy of the timing of cargo scheduling, the weather, and even the quality of signals that the vessels themselves transmit. Indeed, maintenance at the key port of Primorsk cut shipments there to just three cargoes in the week to Dec. 16, down from a more normal weekly loading rate of about eight.
As for Kozmino, which we discussed over the weekend, the flow will recover, at least partially, in the week to Dec. 23, with three ships already loaded and two more berthed half way through the period. But, with a smaller fleet of ships available, volumes could remain erratic.
A bigger problem for Russia is whether China, India and Turkey will keep purchasing less Russian oil: as shown in the next chart, the volume of crude on vessels heading to China, India and Turkey, the three countries that have emerged as the only significant buyers of displaced Russian supplies, plus the quantities on ships that are yet to show a final destination, fell in the four weeks to Dec. 16 to average 2.53 million barrels a day. While that’s more than four times as high as the volume shipped in the four weeks immediately prior to Russia’s invasion of Ukraine in late February, it is the first time in five weeks that the amount has fallen. Inflows to the Kremlin's war chest also slumped.
Amid the post-cap chaos, tankers hauling Russian crude are becoming more cagey about their final destinations. The volume of crude on vessels leaving the Baltic and showing their next destination as Egypt’s Port Said or the Suez Canal jumped to 686,000 barrels a day on a four-week average basis. It remains likely that many will begin to signal Indian ports once they pass through the waterway, while shipments to the United Arab Emirates are becoming more common.
This trend is only going to get worse: as Bloomberg reports in a separate report, the largest US major, Exxon Mobil, is avoiding hiring oil tankers that previously carried cargoes from Russia, putting itself in the same camp as Shell Plc with a move that pressures owners to choose whether to serve Moscow’s interests or not.
The US oil giant, which has repeatedly been in Joe Biden's crosshairs for its "more money than god" (but was largely ignored when oil hit -$40 and many speculated that XOM could be facing insolvency in short notice) and will desperately seek to avoid any future confrontations, began asking that, from Dec. 5, shipowners must ensure the tankers on lease to Exxon haven’t carried crude cargoes which are either Russian, originated in Russia, or come from a person connected with Russia, a clause seen by Bloomberg shows. Failure to do so would allow Exxon to terminate the charter. The approach is similar to that of Shell, whose first preference is for ships that haven’t carried Russian crude in their last three cargoes.
Moves by such big firms magnify the pressure on ship owners to choose between serving Russian and non-Russian interests.
Shipping firms intending to transport the nation’s barrels can already only get industry standard insurance and an array of other G-7 services if the cargoes they’re hauling cost $60 a barrel or less. The measures included a clause that if companies pay above $60 then they can’t access key EU services for the transportation of Russian cargoes for 90 days.
The Exxon clause doesn’t apply to Kazakhstan’s CPC oil, so long as the seller isn’t Russian or connected with Russia, and a Kazakh certificate of origin is received.
Exxon’s mandate expands from Feb. 5, 2023 to Russian oil products, with the same exception as above. That’s when further G-7 sanctions will kick in, affecting refined fuel markets.
As we reported previously, the G7 price cap triggered the emergence of a so-called dark fleet of tankers that are expected to be dedicated to servicing Russia’s interests. Moves like Exxon’s and Shell’s make it harder for those vessels to return to non-Russian business.
But the trigger event for chaos will be when oil prices rise enough to push Russian Urals, which is currently trading in the upper-$40s and is thus exempt from the G7 price cap, above $60. At that point, the cheapest and most abundant source of oil for Europe and Asia will be in breach of western sanctions and that's when the real test of the oil price cap will take place: will western politicians ignore their entire virtue-signaling exercise (this would be their preferred course of action), or will they make it impossible for Urals oil to be shipped out, leading to a sudden and sharp collapse in oil output, and just as sharp spike in the price of all other oil.
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1- The rise in oil prices which means that the price cap on Russian oil exports has collapsed and will soon be consigned to a waste bin.
2- China’s unquenchable thirst for Russian energy products particularly oil, buying more than $69 bn so far this year or 69% of the entire purchases by the EU of Russian oil, gas and coal in 2022.
3- China, India and scores of Asian countries and oil traders have already declared that that they will ignore the price cap.
4- The volume of crude on vessels leaving the Baltic and showing their next destination as Egypt’s Port Said or the Suez Canal jumped to 686,000 barrels a day on a four-week average basis. These could be destined for delivery to Egypt and Arab Gulf States and also India.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert