Page 4 - FSUOGM Week 12 2022

FSUOGM COMMENTARY FSUOGM

Buying Russian oil is “like eating

toxic nuclear waste” again

Buyers are either shunning Russian oil completely or are having difficulty
with transactions and shipping arrangements.

RUSSIA IN the midst of the 1998 financial crisis Adam problems exporting crude and refined prod-
Elstein, the managing director of Bankers Trust’s ucts. Although there are willing buyers, gener-
WHAT: Moscow office, famously told the Financial ally speaking, for Russian oil, especially in Asia,
Urals is trading at a Times’ John Thornhill that he would rather “eat arranging the shipping and payment has become
record discount to Brent. toxic nuclear waste” than buy Russian assets. extremely challenging,” BCS GM’s oil analyst
Following President Vladimir Putin’s attack on Ronald Smith said in a note. “The IEA estimated
WHY: Ukraine on February 24 Russia is back in that earlier this week that Russian oil output will
Sanctions have caused place. have to be cut by 3mn bpd in April due to these
logistical difficulties Some oil traders are doing everything they constraints.”
for Russian exporters, can to avoid doing business with Russia, even Prior to the invasion, Russia was exporting
and some buyers are though Russian oil exports have largely not been more than 5mn bpd of crude oil – equivalent to
shunning Russian crude. sanctioned yet. Even those traders willing to buy nearly half of its overall production – as well as
Russian oil are having problems, as banks are 3mn bpd of refined oil products. That means if
WHAT NEXT: very reluctant to issue letters of credit (l/cs) or the IEA's estimate is right, 60% of Russia's usual
European buyers are transfer money to Russia, even to unsanctioned crude oil exports are now piling up in storage.
increasingly move banks. This will cause a huge dent in Russia's export
away from Russian oil, So far, only the US has slapped a ban on revenues. According to Russian federal customs
but exports to friendly imports of Russian oil but Christof Ruehl, Sen- data, the value of its oil exports exceeded $110bn
countries like China will ior Research Scholar, Columbia University in 2021, up nearly 52% year on year on the back
be relatively stable. and the former chief economist at BP, told bne of soaring oil prices and the easing of OPEC+
IntelliNews in a recent webcast that the ban will quotas.
have little real impact on Russia’s oil business and Over 30% of Russian oil exports in 2020 went
is largely a gesture, as Russia's exports to the US to China, according to the US Energy Informa-
account for less than 2% of its business and the tion Administration (EIA), and Beijing has no
oil is easily rerouted to other markets. political motive for declining these supplies.
Nevertheless, the threat of sanctions, difficul- Most of this oil is produced in Eastern Siberia
ties with shipping and payment arrangements, and is classified as ESPO blend, the low-sul-
and in some cases the fear of drawing public phur content of which makes it more expensive
criticism, has meant many traders are shun- than Urals. Furthermore, reports indicate that
ning Russian oil if they can. This has led to the Russian oil suppliers and their Chinese buyers
discount of Russia's flagship Urals blend to the are finding ways of getting around the added
benchmark Brent price blowing up more than problems caused by sanctions. Reuters reported
ten-fold. Urals has always traded at a small dis- on March 11 that Siberian oil firm Surgutnefte-
count to Brent because of its higher sulphur con- gas was allowing Chinese buyers to receive oil
tent, but whereas pre-war this discount was $2 without providing guarantees, known as letters
per barrel, it now stands at close to $30. of credit, to sidestep Western restrictions. Nev-
The West has largely avoided slapping sanc- ertheless, ESPO's usual premium to most other
tions on Russian oil – a critical revenue stream benchmarks has also plunged in recent weeks,
for the Kremlin – given the impact this would indicating that flows to Asian markets have also
have on already-soaring global energy prices. been affected.
But the market has done the job of sanction- In joint second place were Germany and the
ing Russian oil exports on its own. Spot Urals Netherlands, which accounted for 11% each of
cargoes continue to flow out of Russia, because the oil that Russia shipped overseas in 2020, and
some buyers, especially in Asia, are prepared to other OECD countries in Europe took a fur-
receive them despite the controversy and com- ther 26%. And this is where the sharp decline in
plications, and others are simply not in a posi- Urals exports is mostly coming from. A number
tion to find alternatives. However, given a choice of European governments and companies have
many traders avoid buying Russian oil if they said they will try to limit Russian oil purchases
can, as dealing with Russia has become so toxic. where possible. South Korea took a further 6%,
“Russian oil companies are facing significant while other Asian buyers received 5%.

P4 www. NEWSBASE .com Week 12 23•March•2022