The relocation of around 650,000 barrels per day (bpd) of Russian crude oil is expected from advanced economies, consultancy Wood Mackenzie said on Tuesday.
This tactic of crude swapping between self-sanctioning advanced economies and developing markets is poised to rebalance the global crude oil trade, according to the consultancy.
Following US sanctions on Russian crude oil, European companies began to ‘self-sanction’, resulting in the displacement of with up to 1.2 million barrels per day (bpd) of medium grade Urals crude.
WoodMac said similar action in Japan and South Korea resulted in sharp declines in the weekly export volumes of ESPO, another medium grade crude, in the week ending March 25 but export volumes recovered for the week ending April 1.
“We estimate advanced economies such as the EU, Japan and South Korea could swap about 650,000 bpd of Russian crude oil – 400,000 bpd of Urals, 170,000 bpd of ESPO and 80,000 bpd of East Russian lights - with similar grades and volumes predominantly from the Middle East procured by China and India,” said Managing Consultant Alex Sun.
Sun said that this reshuffling is attractive at current Urals discounts, but he warned that in the near term, refiners face challenges with contractual obligations with Middle Eastern producers.
China is a key market for Russian crude exports particularly medium grades such as ESPO and Urals. The former is favored by both state-owned enterprises and private refineries, due to pipeline connection and proximity for waterborne delivery.
Urals has a similar quality to Middle Eastern crude, which Chinese refineries process in large volumes. Additionally, steep discounts in Urals has allowed China to avail of the opportunity to fill its declining strategic reserves.
“The Russia-Ukraine conflict has made Russian grades commercially attractive, but as we have observed in recent weeks, auctions have been cancelled due to few participations. Also, we did not see China take up European Urals cargoes. Even for eastern grades, a number of transactions have now gone private,” Sun said.
WoodMac underlined that despite being a key market for Russian crude oil, China has not been buying Urals in large quantities since the invasion started.
China has established long-term contracts with many Middle East suppliers and sanctions have made crude freight expensive given the lengthy shipping time for Urals compared to Middle Eastern crudes. The challenges with payment methods and insurance have also contributed to the decline in China’s imports of Russian Urals.
China and India process about 5 million bpd of Middle East medium grades, similar in quality to Russian Urals, on long-term contracts.
Both markets would need to displace crude imports from Africa and the US to accommodate an increase in Russian volumes, the agency explained.
“A 10% contractual flexibility could create space for 500,000 bpd of Russian crude into China and India. But there remains about 150,000 bpd of Urals and East Russian oil that need to be relocated to other markets in Asia,” it said.
By Sibel Morrow
Anadolu Agency
energy@aa.com.tr