Russian crude cargoes lucrative for Asian importers

Lucrative offers for Russian spot crude cargoes may look attractive at first glance, but Asian oil importers appear reluctant to close deals as they cautiously weigh shipping risks, bandwidth to absorb incremental supplies, and risks to sensitive bilateral relations with key trading partners.

Although crude oil above $100/b makes any kind of discount attractive to Asian oil consumers – which rely on imports for 70%-100% of their needs – most refiners are sticking to their traditional suppliers such as the Middle East, Latin America and Africa for bulk of their purchases even though the cost is higher, analysts told S&P Global Commodity Insights.

But analysts said some incremental spot Russian volumes could go to countries like China and India.

“The escalating Russia-Ukraine conflict, related sanctions and the direct import ban by the United States imposed on Russia have made oil buyers reluctant to acquire Russian barrels,” said Kang Wu, head of global demand and Asia analytics at S&P Global Commodity Insights.

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“While the room for Asia to buy additional Russian crudes remains uncertain, the Middle East is likely to drive the growth of Asia’s crude imports in 2022,” he added.

Prior to Russia’s invasion of Ukraine on Feb. 24, ESPO crude commanded a premium of more than $6/b to Platts front-month Dubai. However the price differential for the medium sweet Far East Russian crude has fallen sharply over the past several trading cycles and it was last assessed at a discount of $6/b to Dubai March 10.

Asia imported about 1.6 million b/d of crude from Russia in 2021, accounting for less than 5% of regional imports. The majority of Russia’s crudes were bought by China, with half the volume transported via pipelines, according to S&P Global.

“I don’t know if any Asian buyer can buy any Russian crude yet. As you can see, Shell bought it and the aftermath of it is visible,” a trader with a North Asian refinery said, referring to Shell’s recent announcement that it was stopping all spot purchases of Russian crude oil with immediate effect.

Cost not the only factor

For Asia, snapping up discounted Russian cargoes for refineries that are not used to using it may result in more pain than gain, analysts said.

For instance, China has the capacity to absorb plentiful volumes of unwanted Russian crude, but Chinese refineries have their own margins, run rates and fuel production plans, as well as refinery linear programming models to consider, said a feedstock manager at PetroChina based in Beijing.

Some refiners would also like to keep using a certain percentage of Middle Eastern, African and South American crudes as it would be extremely difficult to drastically alter refinery configurations and base crude slate models to absorb unusually high volumes of Russian crude, the manager added.

But elsewhere, several Southeast Asian and South Korean refiners said purchasing Far East Russian crude cargoes from non-Russian equity holders remained a viable option and continued to be part of companies’ monthly feedstock procurement plans.

“Many monthly spot Far East Russian crude cargoes are offered by non-Russian upstream players and there’s actually no problem or hurdles buying Russian crude from these international companies,” said a sweet crude trading manager at a major South Korean refiner.

The recent sharp declines in spot price differentials for ESPO, Sokol and Sakhalin Blend have no doubt ignited some buying interest in recent trading sessions, trading desk managers at refiners said.

But surging shipping and insurance costs are poised to overshadow the spot discounts, while buyers are expected to face ample logistical hurdles and delays with many shipowners refusing to call into Russian ports, they added.

“Government and customs authorities are also requesting additional documents for bulk vessels and tankers arriving directly from Russian ports. This means extra paper work and unnecessary delays,” said a feedstock management source at a Thai refining and petrochemical company.

Focus on Middle Eastern supplies

Fear of sanctions has moved up a notch with refiners assessing the impact of the US’ ban on Russian energy product imports and the UK’s commitment to phase out such imports by the end of 2022.

While buyers shun Russian barrels, spot differentials for Middle East grades for May loadings have surged as is remains the only option for now. Spot differentials could go even higher as demand grows amid tight supplies, a trader in Singapore said.

“As a refiner, the idea is to avoid the spot market and try elsewhere,” the trader added.

However, product demand remains healthy and slashing refinery runs may not be the most prudent option, the trader said, adding: “Product inventories are low and refineries cannot just shut off. Governments will intervene.”

With no end in sight for the ongoing market volatility, price-sensitive countries like India will bear the brunt of expensive crude, which could lead to demand destruction eventually, an Indian refining source said.

Russia is looking to boost its oil exports to India after a dramatic decline in interest for its oil among Western consumers since the country’s invasion of Ukraine, Russian deputy prime minister Alexander Novak said March 10.

Source: S&P Global

Tags: Asian Oil, Asian refiners, Imports, Indian, Russian Crue Oil