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Value of Russian oil exports fall as G7 price cap nears

According to the report, many expect refiners in China, India, and Turkey—the top current destinations for Russian crude— to absorb more of the affected oil. (AP)Premium
According to the report, many expect refiners in China, India, and Turkey—the top current destinations for Russian crude— to absorb more of the affected oil. (AP)

  • According to a S&P Global Commodity report, the outright price for Russia’s flagship crude Urals slumped to 22-month lows in the run-up to the Dec 5 start for the mechanism as weak physical market fundamentals and anxiety around sanctions risk have spurred even steeper discounts

NEW DELHI : The value of Russia’s key crude exports has come under renewed pressure as EU sanctions and the G7’s price cap edge closer amid growing signs that the curbs pose little threat to Moscow’s resilient output and oil revenues, S&P Global Commodity Insights said in a report on Tuesday.

According to the report the outright price for Russia’s flagship crude Urals slumped to 22-month lows in the run-up to the December 5 start for the mechanism as weak physical market fundamentals and anxiety around sanctions risk have spurred even steeper discounts.

“The discounts for Urals and ESPO—Russia’s eastern-bound export crude—against regional benchmarks have also widened again in recent weeks although they remain well below record levels seen in the aftermath of Russia’s February 24 invasion of Ukraine," it said.-

Platts, part of S&P Global Commodity Insights, assessed medium sour Urals at $54.935/b November 21, the lowest since 29 January, 2021. Compared with Dated Brent, the Urals discount widened to $29.50/b November 24, its highest since August 11.

 Russia’s eastbound ESPO crude is valued higher and Platts assessed it at $74.32/b Nov 25. But the grade has also lost ground against regional benchmark Dubai over the last week, Platts data showed.

According to S&P Global Commodity Insights, the weakening values for Russian crudes come as G7 moves closer to setting the level of its price cap on Russian oil, designed to stymie the Kremlin’s oil revenues by controlling access to shipping services.

“But following a week of crunch talks between diplomats in Europe to hammer out the mechanism’s closely watched price cap, reports that the price ceiling considered could be a higher-than-expected $65-$70/b has surprised the oil markets," it added.

Russian crude has been trading at record discounts of up to $40/b in wake of Russia’s invasion of Ukraine as key buyers in Europe shunned Moscow’s oil. The bulk of Russia’s crude exports is now flowing to refiners in Asia, with China and India being its key customers.

With the oil market turning bearish as a growing list of poor economic data has undermined confidence in demand, Brent crude prices and Urals crude differentials have taken a hit in the past few weeks.

S&P Global forecasts Russian crude and condensate output to fall by 1 million b/d between November and March, that is 1.5 million b/d below pre-conflict levels, due to the looming EU bans and G7 restrictions on maritime services and financing. The EU crude import ban and G7 price cap will both be in place from December 5 onward.

But Paul Sheldon, chief geopolitical advisor at S&P Global, said odds are rising that supply could exceed expectations. “Russia has already had significant time to prepare, increasing its ability to secure a sufficient fleet of ships and non-Western maritime services," Sheldon said. 

“A softening of the EU ban on ships not complying with the price cap (if finalized) could increase tanker availability, more sanctions exemptions could arise, and/or a price cap as high as reported levels could cause Russia to hold its nose and maintain supplies, especially if the alternative is damaging shut-ins."

Almost five months in the making, G7 nations have yet to set the maximum price at which shippers from G7 and EU countries may legally transport Russian crude and products. Russia has so far insisted it will not sell its oil under the price caps, which forces it to develop alternative supply chains to bypass the measures or shut-in its displaced oil.

According to the report, many expect refiners in China, India, and Turkey—the top current destinations for Russian crude— to absorb more of the affected oil. Combined, the three buyers have seen their seaborne imports of Russian crude almost treble from prewar levels to over 2 million b/d, accounting for nearly 70% of Russia’s seaborne flows.

“But the logistical risks brought by the new sanctions regime present an additional hurdle. The so-called shadow tanker fleet carrying Russian crude is expanding, with the G7 oil price cap regime expected to banish Russian barrels into non-mainstream trades. This is likely to exacerbate maritime trade risks for the shipping industry," it added.

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