Asia may see higher Russian crude inflow after upheaval, Moscow drift from OPEC stance

Asia could witness higher inflows of Russian crude following the aborted military uprising as Moscow could deviate from OPEC's tight supply stance and push more cargoes overseas in an attempt to secure revenues to strengthen its political and military power, crude traders and analysts said.

While the attempted coup by mercenary leader Yevgeny Prigozhin has prompted concerns about the vulnerability of Russia's alliance with OPEC, it has also raised some questions among refiners in China and India, who are now purchasing plentiful volumes of Russian oil.

"There are no signs at present that Russian oil supply is in jeopardy. But there is a risk about Russia that is more apparent now than a few days ago. A potential, perhaps even distant risk, is not likely to move prices upward unless more, near-term worries materialize," S&P Global Commodity Insights said in a note.

Traders and officials at Indian, Chinese, South Korean, Japanese and Thai refiners said that the attempted military coup in Russia June 24 indicated Russian President Vladimir Putin's political future could be vulnerable.

This means Putin could pay less and less attention to the OPEC+ alliance's collective output and market stability strategies as Kremlin's utmost priority would be to make sure the regime's finances are secure, the refinery and trading sources added.

"I think compliance to the supply cuts by Russia would no longer be Moscow's key agenda. Putin's regime will focus on strengthening political and military power and Putin needs more oil sales to achieve that," said a senior crude trading manager at a state-run Chinese refiner based in Beijing.

Asia could witness more inflows

On June 26, Russia's Deputy Prime Minister Alexander Novak said that the oil industry was operating normally.

Russia's monthly seaborne crude oil exports averaged 3.3 million b/d in late June, compared with the May average of 3.8 million b/d. However, volatility in weekly and monthly loading rates is typical and not a sign of a systemic and sustained drop in production or exports. Maintenance at the port of Primorsk is one of the factors contributing to lower exports in June.

South Korean refiners have completely moved away from Russian crude for many months now but Far East Russian suppliers Rosneft and Sakhalin Energy have not stopped making their monthly Sokol, ESPO and Sakhalin Blend crude tender offers, said a feedstock manager at a major South Korean refiner. "I expect Russian suppliers to further step up their Asian marketing efforts."

The OPEC+ alliance's production cuts have been working against major Middle Eastern crude producers but more in favor of Russia, in terms of market share in Asia's biggest importers China and India, Asian traders and refinery sources said.

China's crude imports from Russia hit a record high of 2.30 million b/d (9.71 million mt) in May, with inflows 32.6% higher than 1.73 million b/d from the second-largest supplier Saudi Arabia, S&P Global reported earlier citing General Administration of Customs data.

Indian refiners aim to process a maximum of up to 45% of their total crude oil needs from Russia, a significant shift in the South Asian nation's crude slate as Russian crude used to make up just around 2% of its total crude import basket in 2021 and the years before.

In 2022, the share of Russian crude in India's total refinery feedstock (crude) import basket was close to 20% and this year it's projected to reach close to 40%, according to 12 traders and analysts at multiple refiners and trading companies across Asia surveyed by S&P Global.

"Russian seaborne flows to Asia will likely stay at the currently high level of above 3.5 million b/d for the rest of the year compared with an average of 1.3 million b/d pre-war. Majority of the incremental buying in Asia will be driven by China and India due to lower costs," said Wang Zhuwei, S&P Global's Asia oil analytics manager.

China's spot Russian trades

Chinese refiners and analysts said there was no immediate effect on their Russian crude buying, although there could be implications over the longer term.

"We don't see an immediate impact over the Russia-Ukraine war, no immediate risks or sanctions. [Russian] crude procurement is just running as usual," a Beijing-based analyst said.

Market sources said the most recent Far East Russian ESPO Blend crude spot trades to China were done at front-month ICE Brent futures minus $4.6/b on DES basis, compared with discounts of over $5/b in May and minus $7 to $8/b in early 2023.

Seaborne ESPO cargoes are usually priced against Platts Dubai on FOB basis, but translated to prices against ICE Brent futures for China's private sector refiners.

The narrowing ESPO Blend crude discount to the European paper benchmark comes as the spread between Brent and Dubai has fallen to a near three-year low.

Platts assessed the prompt Brent-Dubai Exchange of Futures for swaps, or EFS, at minus 14 cents/b on June 28, marking the lowest spread since minus 22 cents/b on Oct. 20, 2020, showed S&P Global data.

Meanwhile, Urals offers were seldom heard in the market due to declining supplies while most of the barrels were snapped up by Indian traders, refinery and trading sources based in Shandong said.

Small-sized independent refineries prefer to take Iranian Light which is offered at discounts of around $12-$13/b against the front-month ICE Brent futures on a DES Shandong basis.

Trading sources said that Iranian crudes are more attractive when the price is $5/b lower than Urals.