Russia's money flows from oil should take focus rather than supply limits: Vitol's Muller

The world should focus on finding ways to limit money flows from Russia's oil as economies will need its crude even as sanctions and bans are imposed on its crude supplies, the head of Vitol Asia said July 3.

"The world is facing a political desire to implement measures to restrict the supply of Russian oil, but the total supply of Russian oil is too large for the world to do without," Mike Muller told the Gulf Intelligence daily energy podcast. "The world cannot do without 7% to 8 % of its total fossil fuel supply."

G7 leaders discussed in their June 26-28 meeting in Bavaria a potential price cap on Russian seaborne crude purchases in an attempt to disrupt oil revenue from one of the world's biggest producers, but traders have cast doubt on their attempt.

"So, the world will have to come to grips with ways of sanctioning the money flows to Russia if that is their desire without stopping the oil flows," said Muller. "How it is going to be done is awfully, awfully difficult."

Prior to the onset of the war in Ukraine, Russia was a significant supplier of oil to the world, exporting more than 7 million b/d of crude and petroleum products, or some 13% of the total oil trade.

At present, the UK and US have agreed to ban Russian oil with the EU banning Russian seaborne crude purchases by the end of the year.

Shipping hurdle

Sanctions imposed by the EU in their sixth sanctions package in early June included a prohibition on EU operators insuring and financing seaborne transport of Russian oil to third countries after a wind down period of six months.

Shipping insurance is the biggest hurdle for traders transporting Russian crude that is heading to Asia, Muller said.

"The biggest challenge facing the trading world is how to ship all Russian crude, the incremental Russian products to Asia if that is indeed the destination that remains," Muller said.

"Ships owners need to find insurance and find ways of getting paid."

The global oil markets could have been further squeezed if it weren't for lower consumption in China, where strict lockdowns to combat COVID-19 outbreaks in key cities helped temper demand and tame the oil price rally, he said. The release of oil stocks in the US has also helped keep prices in the low $100s per barrel.

However, tightness in the market may resume if Asian economies strengthen, boosting demand.

"If we see a resurgence of Chinese demand and they stay on top of COVID-19 and if the Asian economies keep showing the same demand growth they have shown, despite the high prices, then indeed we have a supply tightness in the market," he cautioned.

Refining margins

With regards to refining margins, they are at levels that nobody would have predicted and could lead to demand destruction due to underinvestment in the downstream sector, closure of several refineries and threat of reduced oil product exports from Russia, Muller said.

"I think consensus out there seems to be that refining margins cannot possibly be going higher than this," he said. "Demand will be destroyed and refineries are at peak utilization and that's going be a question whether the tightness of products is going to be transferred into a tightness of crude."

What is exacerbating the squeeze in oil products is export and import quotas in China, which may be among the few remaining countries with some spare capacity at its refineries, particularly the smaller independent ones, he said.

"China on the oil side is very much shackled by the imposed export and import quotas for crude feedstocks and these have been kept extremely tight which is necessary because Chinese domestic prices up in the independent area of Shandong are still below international market prices," he said.

The average utilization rate at Shandong's independent refineries climbed further to around 66% in June from 60.6% in May amid rising refining margins, with use of more discounted Russian feedstocks, according to local information provider JLC.

S&P Global Commodity Insights data in June showed China's four state-owned refiners lifted their average utilization rate to 75% from a two-year low of 73.4% in May, suggesting a gain in throughput on the back of higher runs at independent refineries.

"The absence of Chinese exports is one of the contributing factors toward keeping margins very strong because the one place in the world where we believe there is a bit more spare capacity is indeed the Chinese independent [refining] sector," Muller said.

The large state-owned companies "are producing pretty much flat out but the independent sector as yet is not."