Asian oil buyers will feel pinch of EU insurance ban, but not immediately

Asian import of Russian oil is unlikely to slow immediately following the pledge by the European Union to prohibit EU operators from insuring seaborne transport to third countries, but buyers in the region are already scrambling to make alternative arrangements to sustain purchases after the winding down period.

Analysts said while the announcement will prompt some buyers in China and India to tread carefully, the statement by Dmitry Medvedev, deputy chairman of the Russian security council, that the non-OPEC supplier can bypass the EU ban may keep hopes alive that discounted Russian oil can keep flowing to Asia.

"As the war between Russia and Ukraine rages on, sanctions, and interpretation of those sanctions, are changing constantly. Even after the announcement this week by President von der Leyden that the EU had reached an agreement with the UK to phase out insurance on Russian vessels, uncertainty abounds as to what qualifies as such a vessel and how sweeping this ban could be for global oil markets," Platts Analytics said in a report.

The EU said in a statement on June 3 that its sixth sanctions package prohibits EU operators from insuring and financing seaborne transport of Russian oil to third countries after a wind-down period of six months.

Window to work out alternative options

Medvedev said June 6 that Russia expects to get around the EU ban on insuring Russian oil to third countries by using state guarantees.

Swati D'souza, energy analyst at the Institute for Energy Economics and Financial Analysis, said that insuring the hull of crude oil tankers is not covered under the mega insurance policy by Indian oil companies. The policy only covers the shipped product once it reaches the port of entry.

"Until now, the shipments have been insured by the Russian sellers until it reaches the Indian ports," D'souza said. "The EU insurance ban means even if Russian insurers provide coverage, the re-insurers will be unwilling to provide coverage for the sellers."

"Indian insurance companies are unlikely to step in to provide coverage since they won't be able to get re-insurance," D'souza added. "Therefore, while there may not be an outright ban by Indian insurance companies on Russian oil, the EU ban will likely impact Russian oil imports by Indian oil companies."

Russia is already showing signs of becoming more reliant on Asia. China was the largest buyer of Russian crude before its latest round of COVID-19 lockdowns dampened demand. India imported 836,000 b/d of Urals crude in April compared with just 274,000 b/d and zero in March and February, respectively, according to Kpler data.

China's independent refineries in Shandong are actively sealing deals for Russian Urals, with the first cargo since November 2021 expected to arrive in early June, and at least eight more cargoes later in the month.

A source with a Chinese reinsurance company said his firm had stepped away from Russian oil-related business as it is aware of the potential uncertainties. The Chinese insurance market has to manage all the risks subject to its own underwriting capacity.

"For Russian oil-related business, it might be a challenge to seek all necessary coverage and protection," the source added.

State intervention

Some state-owned insurance and re-insurance companies may look at ways to step in only if Beijing requires them to do so in order to ensure sufficient inflows for the country's energy security, other sources in China's insurance and reinsurance industry said.

"There are always ways for cheap crudes to come in, especially when they remain competitive even after taking into account freight and insurance," a crude trader with a Chinese state-owned oil company said, adding that he expected China and India to take more Russian crudes, while more Middle Eastern barrels could head towards Europe.

Platts assessed Urals at $85.47/b June 1, compared with Dated Brent at $122.96/b, according to S&P Global Commodity Insights data. On Feb. 23, the day before Russia invaded Ukraine, Urals was trading at a discount of around $10/b to Dated Brent.

Some shipping sources said as most shipping insurance and reinsurance institutions and organizations are centered around the EU and the UK, any ban from the EU or the UK on insuring tankers transporting Russian oil will always have implications for shipowners engaging to carry the oil.

Some added that shipping insurance is too international in nature to let shipowners get around the ban very easily. Many Indian and Chinese shipowners engaging in Russian oil-related trades will have to re-assess the risk and fallout from those businesses in the foreseeable future.

"The EU ban on Russian oil is expected to come in stages. We are waiting to hear more on this," a shipping executive said.