Asia may absorb half of the Russian crude displaced by EU

Asia may be able to incrementally absorb only half the Russian crude volumes displaced as a result of the European Union sanctions taking effect, and the price cap of $60/b may not be able to create immediate hurdles for oil flows from the non-OPEC supplier.

While Russia has been arranging a fleet of ships that could let oil to continue flowing to Asia and to other alternate destinations, most non-EU buyers have also been working with non-EU insurance companies to ensure that trade flows do not break any sanction guidelines.

According to Bernstein Research, Russia would require over 100 additional tankers to ship the displaced crude over longer distances.

Chinese independent refineries, which are the main buyers for Russian ESPO in the Far East, are not in a hurry to take Russian crudes as demand in January is expected to be relatively low due to the Lunar New Year and the COVID-19 situation, serval Shandong-based refiners said.

Moreover, most of the independent refining sources in Shandong said they would adopt a wait-and-see approach before buying, to see how the whole procurement process works, when state-owned trading companies step in to buy Russian crude.

A Shandong-based independent refiner said they would prefer to buy Russian crude on delivered ex-ship, or DES, basis to avoid any potential shipping and insurance hurdles.

Although the share of US crude in Asia’s overall import basket in January-September showed a modest year-on-year rise of 76,000 b/d to 1.47 million b/d, the market share of US crude in the same period fell to 42% from 48% in the year-ago period, data from S&P Global showed. Even crude flows from Africa to Asia have declined this year as more shipments get diverted to Europe.

OPEC and its Russian-led allies said after their meeting Dec. 4 that they would maintain their production quotas for now, adopting a wait-and-see stance amid a hazy outlook for the oil market. The decision means the 2 million b/d cut in quotas from October levels will remain in place until the fallout from EU sanctions on Russian crude imports and the G7’s price cap becomes clearer.