Refiners avoid Russian crude purchases amid sanctions threat

Refiners across the world are turning away from buying Russian crude amid uncertainty about the impact of tightening sanctions following Russia's invasion of Ukraine.

While there have been no sanctions announced so far directly on oil trade with Russia, the US, Canada and Europe have blocked some Russian banks from accessing the SWIFT international payment system, among a package of financial sanctions. This could make it harder for trading companies to transact with counterparties as they use banks as intermediaries for transactions, letters of credit and clearing services.

Analysts and market sources said this was already forcing many European refiners and trading houses to reassess their business with Russian oil companies, despite the record low pricing levels for the Russian export grade making it potentially very attractive.

Urals was assessed at its lowest level ever relative to Dated Brent on Feb. 24 but edged 7.5 cents/b higher on Feb. 25 amid a lack of indications in the Platts Market on Close assessment process to be assessed at Dated Brent minus $11.155/b CIF Rotterdam and at Dated Brent minus $10.855 CIF Augusta, Platts data shows..

"Whilst the US has said that there will be exceptions made for Russian energy exports, the market is clearly nervous given that sanctions are becoming increasingly restrictive," analysts at ING Bank said in a note. "The growing risk of sanctions has reduced the appetite of many in the industry to commit to Russian oil."

One Urals seller said that alongside the uncertainty around sanctions, the steep Dated Brent backwardation -- where prompt prices are higher than those further forward -- was negating any incentive for buyers to capitalize on low Urals prices.

Russia accounts for about 10% of total global crude oil supply and Urals crude is a staple for refiners in Northwest Europe and the Mediterranean. Key buyers include Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania, Turkey and Bulgaria.

Finnish refiner Neste said Feb. 28 that due to the "current situation and the uncertainty in the market, Neste has mostly replaced Russian crude oil with other crudes," adding that it was closely monitoring "the development of sanctions and possible counter-sanctions" and preparing "various options in procurement, production and logistics."

Sweden's Preem said it had ceased imports of Russian crude, although it noted that Urals only accounted for 7% of its crude oil purchases.

Other European refiners, including Hungary's MOL, Finland's Neste and Austria's OMV said they were monitoring events in order to take appropriate measures.

MOL meanwhile noted that, while shipments of Russian crude along the major Druzhba pipeline were normal, it could also supply its landlocked refineries in Hungary and Slovakia via the Adria or JANAF pipeline, which can move seaborne crude from the Croatian terminal of Omisalj.

Another alternative supply route is the TAL pipeline, which carries crude from the Adriatic port of Trieste to German, Austrian and Czech refineries, according to sources.

Some refiners like Poland's PKN have already diversified their supplies. PKN's CEO Daniel Obajtek posted on Twitter Feb. 24 that in 2013 the company's Plock refinery "processed 98% of Russian oil. Today, its share in the processing is less than half. We are safe because we did not wait for the current crisis with diversification."

Greece's Hellenic Petroleum said it does not depend on Russian crude, which accounted for 15% of its supplies last year and can be replaced by similar grades, mostly from the Middle East.

However Hellenic, in common with some other European refineries, relies on vacuum gasoil imports from Russia which are used for further processing. Portuguese refiner Galp's CEO Andy Brown said that Russia supplies around half of the world's VGO and European refiners would be in "uncharted territory" if VGO supplies from Russia were disrupted.

Asia-Pacific buying hindered by letters of credit

While some Indian refiners bought Russian crude just before the invasion of Ukraine, many Asian buyers have started backing off from a wide range of Russian commodities like oil, gas, coal and the chartering of Russian vessels on growing uncertainty over payments, traders said.

As a result, Asian banks are taking precautionary measures and stopping the issuing of letters of credit for trading or purchasing Russian commodities.

Chinese independent refiners have also raised concerns that the sanctioning of Russian would shipowners create problems like opening letters of credit that prevent traders from supplying them with Russian crude. This could make it hard for them to buy Russian crudes even if they wanted to, and so for the time being most independent refineries will hold back to see how the situation evolves, according to sources.

Still, even as Chinese buyers of spot Russian crude are temporarily refraining from closing deals, Asia's biggest oil consumer could absorb incremental cargoes if other buyers decide to cut Russian purchases.