Sanctions fear fails to stem Russian oil sales as price discounts lure buyers

Russia's seaborne exports of crude oil continue to flow into world markets at post-pandemic highs as price discounts lure buyers despite the fear of wider sanctions aimed at crimping the Kremlin's cash cow, according to analysis of tanker traffic.

Shipped crude exports from Russian ports averaged 5 million b/d from May 1 - 6, little changed from the 5.03 million b/d average during April when its seaborne exports hit a post-pandemic high, according to shipping analytics provider Kpler.

In the wake of the invasion of Ukraine, Russia's key export grade Urals has been trading at significant discounts to other crudes. Platts assessed Urals at $77.31/b and Dated Brent at $112.41/b on May 5, data from S&P Global Commodity Insights showed. Urals was assessed at $90.72/b and Dated Brent at $100.48/b on Feb. 23, the day before Russia invaded Ukraine.

Although more than 1.8 million b/d of Russian crude exports remain headed for unknown destinations, subsequent updates are likely to show large volumes of crude are being imported by India as it takes advantage of record low values for Russian crudes. In April, India's imports of Russian crude ballooned to almost 900,000 b/d, the data shows, from less than 40,000 b/d in February.

Buyers are taking Russian crude and oil products despite the EU looking to impose a blanket ban on Russian oil imports into the region by year-end, which if fully implemented, would take a heavy toll on Russian oil exports. The EU was importing about 2.3 million b/d of Russian crude and 1.2 million b/d of its oil products before the war before. Although Hungary and Slovakia are seeking extensions to the EU embargo, any delays would only affect some 90,000 b/d and 110,000 b/d of Russian crude and product imports respectively to those countries, according to IEA data.

Tighter sanctions

But even before EU member states agree on a bloc-wide embargo on Russian oil in the coming weeks, exports of Russian oil into the region are expected to drop sharply in just a week as traders heed the small print in existing EU sanctions on Russia.

The EU's fourth sanctions package published March 15 prohibits direct, or indirect deals with majority state-run Russian companies, including Rosneft, the oil arm of gas company Gazprom, and pipeline operator Transneft unless the transactions are "strictly necessary." The existing sanctions also only allow for trades with the Russian-listed entities under preexisting contracts until May 15.

"Following any near-term agreement on oil import sanctions, the next shoe to drop comes from a May 16 EU ban on transactions with Rosneft, Gazpromneft and Transneft that are not "strictly necessary," S&P Global Commodity Insights said in a May 3 note. "Legal ambiguity persists over which oil purchases will be permitted, but recent commentary from trading companies points to a notable fall in seaborne exports from the second half of May."

S&P Global expects Russian production shut-ins to grow from 1.1 million b/d in April, to peak disruptions of 2.8 million b/d in August larger as a result of tighter EU sanctions.

Russia's crude pipeline shipments of over 1.5 million b/d heading east to mostly to its biggest buyer China were largely maxed out even before the Ukraine invasion, due to infrastructure constraints, according to S&P Global.

Blending loophole

The latest shipping data also shows that Russian fuel exports have been creeping higher since March -- reaching 2.83 million b/d in the first six days of May -- or just 16% below higher than average levels recorded for February.

The update comes amid growing awareness over loopholes for Russia to continue to find export markets for its crude and fuels, helped by third-party refiners or sold as blends with non-Russian origin oil.

Shell's CEO Ben van Beurden warned May 5 that the EU's plans cut of flows Russian oil to the bloc could be undermined by imports of processed, or blended Russian crude and oil products from outside the region.

"We do not have systems in the world to trace back whether that particular molecule originated from a geological formation in Russia... that doesn't exist," he told reporters on a quarterly earnings call. "Therefore diesel coming out of a Indian refinery that was fed with Russian crude is considered to be Indian diesel."

The blending of Russian-made fuels with oil products from other sources can also mask the presence of the Russian-origin products, he noted.

Indeed, the Kpler data shows Russian fuel imports to the Netherlands -- home to key refineries and the ARA trading and storage hub -- have more than trebled to 780,000 b/d in the first week of May, from 220,000 b/d in February. The jump suggests that some European fuel buyers are importing more Russian diesel and other products to the Netherlands to blend it with alternative fuel supplies.