Distressed Russian cargoes may do little to ease Asia's pain from high prices

Asia's run rates and oil demand will come under pressure in coming months on the back of high oil prices and tight feedstock availability, and the swelling availability of spot Russian cargoes shunned by buyers elsewhere may do little to ease Asia's pain, speakers at the S&P Global Commodity Insights Asian Refining and Petrochemicals Summit said.

In addition, higher energy prices are already adding to the headache of policymakers in Asia due to rising inflation and its potential impact on prices of food and agricultural commodities, the delegates said.

"We're expecting significant run rate cuts at existing refineries due to the tight supply of crudes worldwide, and it will take time for the market to get balanced again," Royston Huan, analyst for strategy and market research at PetroChina, told the summit.

On the issue of whether Chinese companies will be interested in buying a lot of Russian seaborne cargoes, Zhang Jing, senior analyst with Unipec, said: "We have to consider things at all levels, like whether the sanctions will be involved, as well as cargo insurance and loading issues."

A senior official with a Chinese state-owned trading firm said Chinese crude buyers were likely return to the spot market to buy Russian Urals.

Sinopec is a leading Urals buyer in China, with about 3.52 million barrels of Urals loaded in January and delivered to the country in March, Kpler data showed. Cargo arrivals in China in April, which were loaded in February, would rise to 4.03 million barrels, with Sinopec remaining the leading buyer, according to Kpler.

Benchmark Platts Dated Brent was trading at $107.955/b in early Asian trade March 16, down from a 14-year high of $137.65/b on March 8.

Moreover, the discount for a Suezmax cargo of Urals against Dated Brent hit a record high of $33.36 on an FOB Novorossiisk basis March 15, S&P Global Commodity Insights' Platts assessment showed.

Key Asian buyers

Russia was the second-largest supplier to China in 2021, delivering 1.6 million b/d of crudes -- ESPO, Urals, Sokol and Sakhalin Blend, data from China's General Administration of Customs showed.

Commenting on the issue that some Indian companies have been picking up Russian Urals in recent days, Zhang said this might be a sign that more Russian crudes will come into the spot market soon. "But we will not be a reckless company in this oil market and we will continue to observe how the market will develop," Zhang added.

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.

Indian refiner HPCL has issued a tender seeking various crudes arriving in May and June, including Russian Urals and ESPO Blend. The tender closed March 14, with next-day validity.

Fellow refiner Nayara was said to have bought some Urals crude, while state-run Indian Oil Corp. bought 3 million barrels of the grade from Vitol, according to market sources, though the information could not be verified.

PetroChina's Huan said as Urals cargoes struggle to find buyers in Europe, a lot of those barrels could go to Latin America, West Africa and South Africa.

"Once sanctioned, Russian barrels will be treated like the same as those limited barrels from Iran and Venezuela.... waiting for buyers that are ready to take the risk," he added.

Demand destruction

S&P Global Commodity Insights expects Asia's oil demand to grow by 1.4 million b/d for 2022. "However, we expect downward adjustment as recovery faces headwinds amid rising fuel prices and the disruption of international aviation caused by the Russia-Ukraine conflict," said Lim Jit Yang, advisor for oil markets at S&P Global Commodity Insights.

Vishrut Rana, economist at S&P Global Ratings, told the summit that Asian consumers would feel the pinch of higher energy prices.

"Much of the region is reliant on imported oil and mineral fuels, and this means higher import bills. Higher energy prices will lead to inflationary pressures. In addition, there could be spillovers to fertilizer and food prices," he added.

In some Asian economies, higher import costs could lead to exchange rate pressure, amplifying the effect of rising energy prices," Rana said. Current account deficit economies such as India, the Philippines and New Zealand could face higher risks, he added.