In January, Indian imports of Russian crude oil reached a record. These were up by 9.2 percent on the month to a daily average of 1.4 million barrels. This month, China’s oil imports from Russia are expected to reach a record at 1.66 million bpd.
Taken together, India and China are then taking in more than half of Russia’s total daily crude oil exports, which before the war in Ukraine averaged around 5 million bpd. A lot of that used to be absorbed by Europe. Now, Russia is finding new markets. And a whole new industry of oil traders is emerging.
Energy Intelligence reported this month that at least 20 trading companies—but probably a lot more—are sending Russian oil around the world, replacing all the big commodity market players that pulled out of the country after the EU and the G7 began sanctioning it for its invasion of Ukraine.
Vitol, Trafigura, BP, Shell, Equinor—all of them upped and left whatever business they had in Russia, leaving an empty space. It did not take very long for this space to fill, it seems. It has been filled with newly set up trading firms, most of them set up very recently and outside Europe. And they are not trading in dollars or euros.
The trades that these companies are conducting with Russian oil and fuels are being financed by banks in the United Arab Emirates and Turkey, with European banks, like European commodity traders, “out of the picture,” as Energy Intelligence puts it.
They are out of the picture because of the sanctions and, most recently, the G7 price cap scheme that bans European companies from getting involved in the trade of Russian oil unless it is capped at $60 per barrel of crude. With the Europeans and the Americans out, others are making money.
Most of the new crop of traders involved in moving Russian crude and fuels around the world are based in Dubai, the Energy Intelligence report notes, but Hong Kong is another hub for such trades.
“You will see more of these companies, their names will keep on changing and it will become harder and harder to know who’s behind them,” one oil trading veteran who Energy Intelligence did not name told the news outlet.
Much of Russia’s oil and fuels in this new trade environment are being shipped by a so-called shadow fleet of tankers worth some $2.2 billion, according to a recent Bloomberg report. This has pushed freight rates higher once again, and some in the industry are beginning to worry about a permanent shortage of vessels to carry other oil and fuels around the world.
According to Trafigura, the total number of tankers that have been “reserved” to carry Russian oil could be as high as 600, of which 400 crude tankers. And, according to a senior executive from one tanker company, “These ships will be dedicated to those shadow trades and de facto removed from the markets that we would find ourselves in.”
Earlier this month, the IEA reported that both Russia’s oil production and exports have proven surprisingly resilient to Western sanctions. The head of the agency’s oil industry and markets division, Toril Bosoni, told CNBC that Russian oil output had only fallen by 160,000 bpd from pre-war levels and exports were down by 400,000 bpd—a decline partially offset by higher exports to China, India, and Turkey.
Bosoni noted, however, that despite this surprising resilience, sanctions are working, especially the G7 price cap because, thanks to it, Russia is making less money from its oil. Yet Bloomberg, in its report about Chinese imports of Russian crude, notes that “Urals and ESPO crude were pegged at a discount of $13 and $8 a barrel, respectively, to Brent on a delivered basis.”
Brent is currently trading above $80 per barrel at the moment. A $13 discount would therefore be higher than the $60 price cap that G7 and the EU set for Russian crude oil if it is to be shipped by Western tanker operators and insured by Western insurers. So, if the numbers cited by Bloomberg, based on reports from traders, are accurate, then a certain amount of Russian oil is not selling at such steep discounts.
The IEA’s Bosoni reported that in January, export revenues for Russia were about $13 billion, that’s down 36% from a year ago,” adding that “Russian fiscal receipts from the oil industry is down 48% in the year, so in that sense we can say that the price cap is having its intended effect.”
CNBC then noted that Urals crude had averaged $49.49 per barrel in January while Brent crude averaged $85 that month. That would certainly suggest some efficacy for the price cap and other sanctions.
However, the Bloomberg report suggests the discount may be slimming down as the market settles into its new normal. That new normal appears to involve a lot of new, opaque oil trading firms, a large fleet of tankers, and a lot of trade, excluding dollars and euros.
By Irina Slav for Oilprice.com
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