Here’s how China and India do energy deals with Russia
All the direct and indirect effects of EU sanctions on Russia
On Friday, Russia announced a 5% decrease in crude oil production starting next March. A deadweight reduction in output of 500,000 barrels per day. The press release from Russian Deputy Prime Minister Alexander Novak surprised the market, which immediately reacted with a 2.5% increase in Brent prices, partially reversed yesterday.
Russia is still the world's second largest exporter of crude oil. Shortly thereafter, OPEC+ indicated that it does not plan to increase production to compensate for lower output by one of its members. However, the price of Brent oil has risen by 8% in the last week. In the near term the real impact of the Russian decision on physical volumes is not very significant as there is plenty of oil around and Chinese demand is not that overwhelming. But Moscow's move is certainly a response to the extension of the embargo on petroleum products and the price cap on these, which began on February 5th.
WHAT THE EU, G7 AND AUSTRALIA ENERGY SANCTIONS AGAINST RUSSIA
The sanctions that the European Union, G7 and Australia have imposed after the invasion of Ukraine contain a complete ban on buying or reselling oil and petroleum products from Russia, as well as a ban on transporting and providing services, as well as applying a price maximum (60 dollars per barrel for crude oil, 100 dollars per barrel for diesel) for transactions of the same products between third countries. The purpose of the sanctions is to reduce the Kremlin's revenue to weaken its war economy, while trying not to generate shortages of the products subject to the sanctions. But it is only after breaking records in 2022, thanks to sky-high gas prices, that Moscow's energy turnover now starts to drop visibly.
The secondary objective of the sanctions, ie not to cause repercussions on the physical oil market, will hardly be achieved. Compared to normal market conditions, in fact, the sanctions represent a disturbance that has already revolutionized the logistics of crude oil from Russia and which will now also condition that of refined products.
WHAT INDIA AND CHINA DO
The first effect that has occurred, which we have talked about extensively, is that India is taking on the role of transformer on behalf of Europe that it has never played before. By buying Russian crude and reselling gasoline and diesel in the West, Indian refiners are pocketing a good portion of the rich nominal spread between the cost of Urals crude oil and the $110-115 a barrel price of diesel in Europe .
The second effect is that China is absorbing increasing amounts of Russian crude to transform it in its refineries, thus enjoying lower prices, even if in this case the oil is of ESPO blend quality, more expensive than the Urals. Chinese imports of Russian crude jumped to a record 8.57 million tonnes in January as Russia displaced Saudi Arabia as the top supplier. According to some estimates, buying the discounted Russian crude gave China a cost advantage of around $5 billion in 2022. The third effect is that Brazil is becoming an outlet market for Russian petroleum products. The result of all this is that the ties of the BRICS countries are deepening and tightening, polarizing the world economy into two blocs.
THE OIL SPREAD
But there is something else in the folds of the market's responses to the sanctions. First of all, the artificial spread created between the price cap on Russian crude oil at $60/bbl and the price cap on diesel at $100/bbl represents a respectable theoretical refining margin (crack), which remains in the pocket of Russian refiners. Basically, as long as diesel prices remain above $100/bbl in the West, the Russian refining margin is rich and stable at $40/bbl: ideal conditions for any company.
Secondly, the spread between exported Urals oil (which costs around $50/bbl) and other oils (above $80/bbl) does not end up entirely with the refiners. In fact, two further elements intervene on the crude oil exported from Russia, transport and trading. The transport ban introduced with the sanctions has forced the Russians to offer more to non-Western carriers to move crude oil and products, given that the Russian fleet of tankers is not sufficient. Producers and traders are offering Urals crude $15-20 off the average price of other crudes to Asian buyers and paying the same amount to shipping companies to transport crude and products.
This explains the data communicated by the Ministry of Finance in Moscow a few days ago. According to the Russian authority, the country's oil producers received an average of 49.48 dollars a barrel in January 2023 for Urals crude, down 42% compared to January 2022 prices, 10 dollars below the price cap and with a spread of 30-35 dollars a barrel with respect to Brent. Part of that spread went into Indian refining margins, another smaller part went to middlemen and around $15 a barrel went for tanker use to shipping companies. These, with a real transport cost of around $1.5/bbl, therefore pocket hyperbolic margins.
ACCOUNT TO RUSSIA
The lower revenues for Russian oil producers are therefore offset by the higher profits from intermediation for traders, a good part of whom are Russians. Some Indian refining companies also see significant Russian equity stakes. Also, some shipping companies that transport the crude oil are Russian. Then there are European companies which have sold some old vessels to companies whose headquarters are in the Arabian peninsula and which now transport Russian oil products. As is known, Saudi Arabia and other Middle Eastern countries do not apply Western sanctions.
In conclusion, the idea of hitting Russia in the wallet is not simply reducing Moscow's earnings but is leading to a restructuring of the oil market whose outcome is currently very uncertain.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/cina-india-commercio-petrolio-russia/ on Sat, 25 Feb 2023 07:58:11 +0000.