Page 35 - bneMagazine March 2023 oil discount

bne March 2023 Cover story I 35
In the fourth quarter of last year,
China and India, together with Turkey, accounted for two-thirds of total Russian crude oil exports, being sold at prices over $80, as against roughly 30% of the total volume in the first quarter of last year.
Russia also exports oil via the Druzhba pipeline (chart), which has not been sanctioned at the EU level. The origin
of this oil is also from the Urals fields serving western ports. Pipeline oil to Europe consists of 60% flows through Druzhba’s northern branch (to Germany and Poland) and 40% through its southern branch (to the Czech Republic, Hungary and Slovakia). Over the course of 2022 both Germany and Poland cut their imports of oil via Druzhba to zero, but at an average price of $63 per barrel, according to SSRN.
Russian exports of discounted crude and fuel oil to China jumped to record levels in January as the re-opening of the world’s biggest energy importer gathers pace after the dismantling of Covid Zero restrictions. The buying spree was likely underpinned by private refiners, but state-owned processors are now showing more interest in Russian crude after concerns around potential blowback from the US and
allies kept them on the sidelines. Russia’s overall crude and fuel oil exports to China reached 1.66mn bpd last month, according to Kpler data as of February 20. That’s more than the previous record set in April 2020, when the Asian nation was emerging from its initial virus restrictions. Deliveries to India are also running at record levels of about 1.5mn bpd.
“At first glance, it seems as though
the price cap on Russian oil at $60 per barrel is working like a charm. The market is well-supplied, and there does not seem to be a market deficit that many were fearful of. Russia has not curtailed its production in an attempt to force an increase in prices; it has indeed increased supplies,” said Vakulenko in
a note. “However, this picture may be misleading, as it suggests that Russia as a whole has lost a substantial portion of its revenues. In reality, the situation is much more nuanced.”
FOB shenanigans
The price of Urals is key, as the twin oil sanctions are key to the FOB (free on board) price of Urals when it is delivered to the tanker that is supposed to deliver it to the customer. However, that gives Russia a lot of leeway to play games with the price of Urals to keep it below the
$60 cut-off, after which the oil price cap mechanism kicks in. The reported Urals price is increasingly becoming a guess.
“The Urals price, according to official Russian statistics, and reiterated in the press, is a notional value. Extremely little oil, if any, is sold at this price. This figure is an average of FOB Primorsk and FOB Novorossiysk price assessments, calculated according to methodology, which is irrelevant to the current market environment,” says Vakulenko.
There are many problems with the FOB price, the price that is quoted when the oil is delivered to the tanker. This is not the price that the customer pays, as they also have to pick up all the services like shipping and insurance when the oil is finally delivered at its destination.
Over the last year Russia has been increasingly setting up these services as a way to bring the price it is paid for providing oil without increasing the cost of Urals. For example, it has been widely reported that Russia is operating a “ghost fleet” of tankers for which it can charge (chart). According to recent reports there could now be more than 600 ships in this fleet – enough to carry all of Russia crude and oil production to non-aligned markets.
In the chart (left) the number of ships registered to "unknown" has sharply risen since the sanctions came into force. And as bne IntelliNews reported last year, the Central Bank of Russia (CBR) has also recapitalised Russian maritime insurance companies so they can take over the role of providing insurance and adds more fees at the same time.
The Russian state-controlled Russian National Reinsurance Company (RNRC) has become the main reinsurer of Russian ships, including the state- owned national shipping company Sovcomflot's fleet. RNRC is controlled by the CBR, which has recently recapitalised the company to RUB300bn ($6bn) from RUB71bn and hiked its guaranteed capital to RUB750bn so
the firm has adequate resources to
Country origin of tanker insurance carrying Russian crude oil by departure month
Source: Bruegel analysis of CREA Russian Oil API
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