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- America and Europe are seeking to form a “cartel” for buyers of Russian oil
- The European Union solves the crisis of Russian gas payments in rubles
- Russian oil breaks through as smaller traders emerge
- Uncertainty over the fate of Russia’s refined product exports
The European Union appears to have given up on its plan to phase out Russian oil imports by the end of the year, as it was unable to overcome stiff resistance from Hungary.
The United States and the European Union are now looking for other ways to pressure Russia’s oil revenues, which may take center stage for the oil market in the coming days.
US Treasury Secretary Janet Yellen, who visited Europe last week, discussed the possibility of using “secondary sanctions” to reduce Russian oil prices on the international market with the leaders of the Group of Seven and the European Union.
It would be the formation of a “buyers’ coalition”, where the importing countries would mutually agree on the maximum price they would pay Moscow for its oil.
Insufficient American efforts
Yellen admitted to reporters – in Bonn, Germany, on Thursday – that the idea of a price cap is “attractive from a general economic point of view”, but that “implementing it is challenging”.
President Joe Biden was expected to make the idea the centerpiece of his May 20-24 visit to Japan and South Korea, but the request would not be effective if it were made only to those two countries.
Japan and South Korea both support the West’s moves against the Kremlin, but are relatively small importers of Russian crude, and are in the process of cutting those volumes, as refiners want to avoid the risks and complications in payments and shipping arising from economic sanctions against Moscow.
It is not yet clear whether the US administration plans to deliver the same message to New Delhi and Beijing, as it certainly will not go well.
Russian gas payment crisis in rubles
A potential gas supply crisis in the European Union has been defused by the impasse between the group and Moscow over the latter’s demand for payment in rubles.
First, the EU softened its stance on the issue, informing companies in the region on May 13 that they could open an account with Russia’s Gazprom Bank to pay for gas imports without breaching sanctions.
The caveat was that companies would declare their payment obligations fulfilled, as soon as they converted Euros or US Dollars.
Then came reports that some major gas buyers in the region had opened euro and ruble accounts with Gazprom, and were confident of keeping supplies flowing normally.
Meanwhile, LNG flows to Europe remain high, and gas stocks are back near seasonal average levels, from historical lows last winter.
This led to a contraction in natural gas prices in Europe during the week, and also removed some of the underlying upward pressure on crude oil prices. Front month gas futures on the Dutch benchmark saw their lowest settlement since the start of the Ukraine war on Friday, at €87.902/MWh.
Russian Oil Overcomes Obstacles
The markets understood that the Ukraine war could last for months, but how much Russian oil could get out of circulation, is a basic question without clear answers, can it rise from the currently estimated amount of 1-1.5 million barrels per day to up to 3 million barrels daily in the worst case scenario?
This will depend on the success of any secondary sanctions plan launched by the West, and how effective Russia is in securing new markets, and on creating alternative shipping and insurance ecosystems to bypass obstacles.
Last week, reports indicated that China and India are looking to increase their purchases of Russian oil.
China is in talks to buy additional supplies for its strategic reserves, while India is in intergovernmental talks to secure discounted Russian crude under short-term contracts, according to news reports.
Meanwhile, Russian producers are finding new ways and intermediaries to ship crude to buyers in Asia.
The void left by the withdrawal of Vitol, Glencore and Trafigura from Russian trade is filled by dealers such as Geneva-based Lukoil’s Litasco, and little- and medium-sized brokers little known in Asia and the Middle East, according to agency news.
This suggests that unless the West imposes and strictly enforces any secondary sanctions on buyers in Asia, Moscow will find solutions to its surplus crude.
Russian oil producers Rosneft and Gazprom have begun booking state-owned Sofcom Float tankers to export crude to Asia, and the Sofcom Float fleet has become increasingly out of action in recent weeks, as traders, buyers and Western insurers have shunned it.
The decline in exports of Russian products
Overall, Western sanctions reduced Russia’s refined product exports from about 3.25 million barrels a day in February, to 2.5 million barrels a day in March and April, but its crude exports were not affected.
The arrival of Russian fuel oil in Greece has jumped to record levels, to be blended and reloaded for export via ship-to-ship transfers, but how successful Russia will be in finding new markets for its refined products – particularly diesel that Europe has rejected – is uncertain.
China and India may receive more crude oil from Russia, but they are not the natural buyers of its refined products, as they are net sources of fuel.
However, Latin America, which relies heavily on the United States for refined products, is now losing out to Europe and could, in theory, provide a home for surplus Russian products.
Before the Ukraine crisis, about 80% of US diesel exports went to Latin America, with Mexico, Brazil, and Chile being the main importers.
These flows are now increasingly being absorbed into Europe, a trend that is unlikely to abate any time soon.
However, sustainable international trade transitions take time to establish. Sanctions may close existing routes, but they are not sufficient to form new ones. The economy must work for the buyer, as well as the seller.
In the current situation, the economic situation is complicated by sanctions that pose reputational and business risks, as well as create hurdles and high insurance and freight costs.
* Vandana Hari, founder of the Vanda Insights Center on Energy Markets.
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