Listen: Navigating Russian oil flows amid tightening sanctions

View Full Transcript

Francesco Di Salvo: Hello and welcome to this Platts Oil Markets podcast from S&P Global to Quality Insights. Now today we'll be talking about a fascinating subject, exploring the new changes in flows for Russian Urals crude, but in particular the new markets that this crude is now reaching. Despite the pledges between OPEC+ to curb production, we've actually seen the rise in the exports of the crude oil that's coming out of Russia, particularly the flagship Russian Urals crude. Now I'm joined by a panel of experts today. We have Robert Perkins, who is managing editor of our downstream oil use here at S&P Global Commodity Insight. And also Luke Stuart, who is one of our prized reporters covering the Mediterranean crude market and focusing on Russian Urals. And Elza Turner, who is our senior editor looking at refineries and the Russian domestic market. Welcome to you all.

Rob, if I could start with you, we were just alluding to the fact that Russia has now increased its exports despite all the efforts that are being made, even at a regulatory level to actually curb the possibility of Russia to maintain these very steady and high levels of export. What's the situation?

Robert Perkins: Yeah, we've been tracking the flow of Russian crude and products exports now for a while, ever since the West, the G7 led initiative to try to clamp down on Moscow's oil revenues by controlling basically the value of their crude and product exports through vessel tracking data. So we recently updated those numbers and we ran a story that Russian crude exports were up 200,000 barrels a day during June versus May. So rebound there. I guess it's worth pointing out a couple of things. First of all, this above pre-war levels, Russian seaborne crude exports, they don't include the pipeline flows to China, which are fairly significant as well, but they were about the 3.5 million barrels a day and now they're about 3.7 in June. So they're above pre-war levels. But again, we should also remember the whole point of G7 sanctions and the so-called price cap on Russian crude and products wasn't to stop or halt the flow it was to devalue the revenues that Moscow was getting from all exports.

The other thing I think is a trend that we saw quite early on in the evolution of the oil price cap, which came into effect in November, 2022. There was the impact of the flows. As you point out, Francesco, there was a massive shift away from its traditional customers. Buying Ural crude means south grade in Europe towards India and China. India quickly became Russia's biggest buyer of crude. China is second place and Turkey usually hovers around third. Some of that is coming to European pumps and fuel stations in the way of refined products in those countries and that's perfectly allowed under the sanctions regime. So there's no issues with that, but the crude and products are essentially still there. They're ebbing and flowing and I think one thing that we can talk about and we'll come to is the way that the Ukrainian refining attacks and the way they have impacted the product flows from Russia since the start of the year.

So that's something again, we've been closely tracking and the huge jump in long-range drone strikes into Russia hitting their refineries. They hit a peak in March taking more than a million barrels a day of Russian refining capacity offline that fed through to the oil product export markets from Russia, and in April we saw like 20% drop on the year of Russian product exports. They're some of the main things that we are seeing and the way that feeds into the value of the crude is something we can talk about as well.

Francesco Di Salvo: Well, definitely and a great summary there Rob. Luke, indeed, we are talking about reshaping of flows and obviously that all comes with a price impact and that's something that you track on a day-to-day basis. What has been the performance of Russian Urals out of Russia?

Luke Stuart: So Platts last assessed Urals on a FOB pre-risk basis around a $14 per barrel discount dated Brent on July 2nd. The average discount through June was around a $14.50 per barrel discount, which has been the strongest monthly average we've seen since November. This placed value for Urals around an average of $68 per barrel through June, more than $2 per barrel up on the month and around $8 per barrel above the price cap. The strength we're seeing in Urals prices correlates with what we have seen across the rest of the European sour crude complex. Globally sour crude supply remains in the tight site on the back of OPEC+ cuts, which mostly apply to sour crude and the ongoing suspension of Iraqi and Kurdish crude through the Turkish port of Çeyhan, which has deprived the Mediterranean of around 450,000 barrels per day of sour crude since March, 2023.

Francesco Di Salvo: And Luke, you talked about the price performance now there is obviously new measures that have been put in place, particularly since June to try and recover further the possibility of these exports reaching out to the market. What is your observation been of the changes in flows?

Luke Stuart: So in the latest round of sanctions against Russia introduced by the European Union on June 24th, we've now seen the EU target Russia's largest shipping company Sovcomflot, along with 27 vessels including 17 crude and product tankers, which are allegedly involved in the so-called dark fleet of transporting Russian oil. They move mirrors that seen by the US earlier this year. According to data from S&P Global Commodities at Sea, the 17 sanctioned tankers hauled around 12.46 million barrels of Urals crude loaded from Russia's Baltic ports since the start of the year. The new sanctions don't appear to have impacted Urals loading so far with CAS data showing 1.9 million barrels per day of a medium sour crude loaded from Russian ports through June, which is around a hundred thousand barrels per day, higher on the month.

India remains a top importer of Urals crude in June according to CAS with close to 1.5 million barrels per day of the crude landing on Indian shores, the highest monthly volume since July, 2023. Of course, the market will be watching closely to see these latest round of sanctions against Russia will have impact on Urals loading volumes in July.

Robert Perkins: Yeah, that's interesting Luke that you point that out. I think the market is definitely looking obviously at the differentials of Russia Urals crude to the key benchmarks and as you say, the dated Brent differential now having shrunk to levels that we are getting close to record lows, and I think it's worth pointing out that one of the main reasons that these differentials or discounts for Russian crude against the key dated Brent benchmark have been shrinking is the inability of the G7 sanctions to really control the value that the Russian crude and products is being sold out. It's quite easy to see that the Primorsk, one of the main loading points in Russia's Urals crude, the value there has been trading above the $60 per barrel G7 price gap pretty much for the whole of this year, and that's in know the short measure is due to the failure of the sanctions to clamp down on the shipping.

The numbers that we've run are that more than 80% now of Russian crude is being shipped in tankers, which are completely outside G7 jurisdictions, and that's a significant jump. I mean, when the sanctions started late 2022, that was around 47%. So it just shows you how they are really struggling now, religious leaders to clamp down on these tankers, which is why they're specifically naming them in these latest rounds of sanctions rather than trying to work it through the insurance and shipping brokers that are based in G7 countries, which are a mechanism which no longer seems to be working.

Francesco Di Salvo: Elza, if I could turn to you, naturally then Russia is a big exporter not only of crude oil, but also traditionally of the oil products. We know very well that Europe used to rely quite heavily on exports of middle distillates, such as diesel for example. But now there has been quite a little bit of on a challenge then to the Russian refineries. We've seen maintenance but also some unplanned outages, particularly as a result of the drone attacks that have been coming in as a result of Ukraine's war efforts. What's the latest on that?

Elza Turner: Yes, Francesco, well, Russia was traditional diesel supplier to Europe, but those exports stopped pretty much last year when the EU stopped importing Russian oil products due to sanctions. So Russia is trying to find new outlets for its products, but generally my sources have been saying that it's more profitable to export crude oil than products. Something that Rob mentioned before. And Russian Port Statistics has also consistently been showing that while crude exports are marginally higher or marginally lower on the year, but pretty much unchanged, product exports have been much lower. One of the reasons, of course, are the drone attacks, which started really in January and took offline quite a lot of capacity. As Rob said, we've been tracking this. We have maps which show the offline capacity throughout the year so far. Recently it seemed that all refineries are coming back online, but in June, throughput is still not much higher.

Actually, it hasn't increased as expected because one of the refineries, NORSI, which had a very big CDU affected by drone attacks, has been trying throughout the second half of June to put it back online and has failed and finally managed to put it online at the end of the month, and it's only now ramping up to capacity. Another refinery, Syzran, only brought it back online in the middle of the month. So these restarts have not been that fast and this is probably also affecting the Russian product export. In addition, the government is very keen to make sure that there is sufficient supply on the domestic market and to avoid the situation of shortages and price spiking like last summer. Nonetheless, they have extended gasoline export permission into July because they did ban gasoline exports from March, but then they lifted this ban. So they'll probably reinstate it in August when there is a peak of driving demand. So we'll see how it all goes. But in general, the consensus is that crude oil exports are outstripping products and they're more profitable for Russian refineries.

Francesco Di Salvo: Very interesting Elza. And no doubt we'll be tracking this very closely as the situation evolves. Well, thank you very much to Elza, to Luke and to Rob and Of course, thanks very much to our listeners for joining us in this conversation. This Oil Markets podcast episode was produced by Felix Fernandez in London.