Baltic Sea

The coming Russian struggle for new markets for its oil

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Russia may increase domestic energy consumption and boost exports to new markets after some ‘unfriendly’ countries rejected Russian oil. That’s what President Vladimir Putin says. It sounds simple, but will become much more difficult in practice when the next wave of restrictions on Moscow’s oil trade hits.

So far, there has been little apparent impact on the amount of crude oil flowing out of Russia’s export terminals. While shipping drifted deeper in the first few weeks after Russia invaded Ukraine, there was no sudden collapse. And the export rate soared in the first week of April, partly due to the easing of Black Sea storms, which had caused a backlog of ships waiting to be loaded at a key port.

What has changed, however, is where many of these ships go. The number of cargoes to Asia from ports in the Black Sea, the Baltic Sea and in one case even from the Arctic port of Murmansk has increased sharply. Crude oil flows from Russia’s western ports to Asian countries have surged from zero in the weeks leading up to the invasion to 875,000 barrels a day in the first full week of April. That’s almost as much as Russia’s daily shipments to Germany, France, Greece, Italy and Britain before the invasion.

While Russian oil companies had to offer steep rebates of more than $30 a barrel to sell crude oil to Europe, they didn’t offer buyers in India the same price cuts. That’s likely to change, however, as state-owned oil refiners turn to privately negotiated deals in the hunt for better terms, rather than buying through public tenders.

But there’s probably a limit to how much India’s refiners will buy from Russia. Increased imports of Russian crude will crowd out purchases from elsewhere, and buyers will likely be wary of damaging ties with their traditional Middle Eastern suppliers. That could limit the volume they are willing to take out of Russia.

There is also the question of the chemical composition of crude oil. Every crude oil is different, and refineries are most profitable when processing a specific grade or blend of grades of crude oil. Increased volumes of Russian crude would need to crowd out crudes of similar quality in terms of gravity and sulfur content, which may also limit the volumes refiners can accommodate.

Increased crude oil flows from ports in western Russia to India and China, potentially offset by higher crude oil flows from the Persian Gulf to Europe, will also weigh on tanker markets. The greater distances will tie up more ships for longer periods of time on each delivery. It takes three times as long to transport a cargo of crude oil from the Russian port of Novorossiysk on the Black Sea to Sikka in India as it does to Trieste in Italy.

The increase is even greater from the Baltics, which has become Russia’s most important outlet for westbound shipments. It takes a day or two to ship crude oil from Primorsk or Ust-Luga to Finland, Lithuania or Poland, and about a week to ship it to the Netherlands or Germany. A trip to the west coast of India takes a month, to the east coast even longer. Given Russia’s pre-invasion of different destinations for its crude oil exports from the Baltic Sea, a complete diversion of flows to India would require five to six times the number of vessels normally used. Increased demand will push up prices – good news for shipowners, but bad news for those who have to bear the cost of transport.

The increase is similar for shipments from Russia’s Arctic port of Murmansk. Most loads make a one-week trip to Rotterdam. They are now on a month-long journey to Paradip on the east coast of India. More may be forced to follow as the EU begins to tighten its stance on Russian oil imports.

Where else could Russia sell its crude oil?

One possibility is China’s strategic inventory if it is willing to offer discounts large enough to make freight attractive to the country’s price-conscious buyers. There have even been suggestions that Middle Eastern oil producers could buy cheap Russian crude for processing at their joint venture refineries overseas, freeing up more of their own barrels for export. Big discounts could make this an attractive offer; volumes could be as high as 200,000 barrels per day.

But if Europe is serious about weaning itself off Russian crude, Moscow needs to find markets for much more than that. About 1.8 million barrels of Russian crude oil were shipped to European ports every day before invading Ukraine.

Using more inside Russia only makes sense if the country has something productive to do with it – that requires a boost in industry, which seems unlikely.

Boosting sales to Asian buyers who show no aversion to buying Russian crude is a superficially attractive solution. But it will be far more costly for Russia than selling to high-paying European buyers on its doorstep.

More from the Bloomberg Opinion:

• The weakness of the Russian fortress economy: Marques & Johnson

• Russia’s default is a question of when, not if: Marcus Ashworth

• The second wave of the Russian oil shock begins: Javier Blas

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. He previously worked as a Senior Analyst at the Center for Global Energy Studies.

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