Asian refiners, traders see G7 price cap for Russian crude around $48-$55/b

Asian refiners broadly expect the G7's price cap on Russian crude to serve as a handy reference point to pressure Russia to slash its crude offers, but feedstock managers at these companies said international market prices would ultimately determine any bilateral Russian trade deals to be conducted in the region over the coming months.

US Treasury's Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg indicated Sept. 9 that the price cap would be greater than Russia's marginal cost of production, and seven out of 11 major Asian refiners and trading companies surveyed by S&P Global Commodity Insights said they anticipated the cap to be around $48/b-$55/b.

The refiners based in Japan, India, South Korea, China and Southeast Asia declined to be identified given the sensitive nature of international diplomacy and corporate trading.

The latest Asian market survey results represent a discount of around $40/b to recent Platts Cash Dubai assessments. Rosenberg said coalition countries will come together in the coming weeks to arrive at a price point for the cap ahead of enforcement in December.

In the survey, feedstock managers supported the US Treasury's strategy to set the price cap at a level that would continue to incentivize Russia to keep supplying crude oil but at the same time minimize Moscow's earnings from oil sales.

China's independent refiners were especially excited about the potential opportunity to buy Urals crude at desirable prices as long-haul shipments of the medium sour Russian grade have been costly and troublesome.

"If there is cap on Urals which would make it a lot cheaper, independent refiners would be eager to increase purchases," a feedstock management source at a privately held Chinese refiner based in Shandong province said.

Discounts for Urals crude have not been sufficiently steep to cover logistics costs as well as independent refiners' additional financing and insurance costs, while many companies were keen to see Russian crude suppliers to offer at even more attractive price points.

Related blog: Fuel for Thought: G7 price cap on Russian oil hangs on Asia's ability to squeeze Russia

Meanwhile, independent Chinese refiners were also hopeful that procurement costs for their favored ESPO crude could fall sharply as they have not been able to purchase Far East Russian medium sweet crudes at particularly low prices so far this year, as many small-scale private sector refiners do not have much diplomatic negotiating influence and status as bigger state-run players, industry and market sources said.

According to sources, several October-loading spot ESPO cargoes were recently concluded at a discount of around 50 cents/b to front month ICE Brent crude futures on a DES Shandong basis; hardly different, if not more expensive when compared with sour and sweet crude grades that many Asian refiners buy from the Middle East and Americas.

Russia's pricing strategy

However, most Asian refiners surveyed highlighted that Russia is unlikely to take the price cap seriously and the non-OPEC producer is more likely to take market fundamentals and benchmark prices into consideration when selling cargoes to Asian buyers.

"Setting a price cap for Russian crudes would be good news for non-G7 buyers, but we need to wait and see if Russia is willing to accept the deal," a senior official at a state-owned Chinese oil trading company told S&P Global.

As European and some Asian refiners wind down or completely phase out Russian crude purchases, they will ramp up imports from key suppliers in the Middle East and the Americas, which would ultimately push up market premiums.

"It's extremely difficult to assume Russia would sell its cargoes far from those price levels," a feedstock manager at a Beijing-based state-run refiner said.

The source at a state-run Chinese refinery said: "It would be naive to think Russia will accept the price cap and sell cargoes at 'super discounts', while Middle Eastern suppliers sell at a premium."

Russia may look to sell near global benchmarks using its own tankers and may also request potential customers to use their own ships so as to work around G7 logistics and financial network, he added.

Several Southeast Asian refiners, including Pertamina, said they would be tempted to pick up Far East Russian sweet crudes, including ESPO and Sokol, but it will depend on Russia's willingness to accept the price cap.

"I highly doubt Russia will respect the price cap," a trader based in Jakarta said. "Russian suppliers are trying to lure more buyers with some discounts, but it's unlikely for them to give away their barrels at much lower prices than other OPEC+ producers."

However, for some Southeast Asian and Indian state-run refiners, such as Indian Oil Corp and BPCL, that operate and own tankers, they could use the price cap as a reference in negotiating for steep discounts on Russian oil deals, industry and trading sources in Singapore and India said.

The Treasury Department's Assistant Secretary for Economic Policy Ben Harris said during a Sept. 9 call with reporters that countries choosing not to participate in the price cap circle would still be able to use the cap as a bargaining tool to negotiate supply and purchase deals with Russia.

South Korea, Japan show little interest

Japan, a member of G7, is part of the price cap scheme, while South Korea's government has expressed its willingness to join the circle during US Treasury Secretary Janet Yellen's visit to Seoul in July.

Regardless of the price cap level, South Korean and Japanese refiners indicated that they are planning to put an end to the purchase of Russian crudes as they look to avoid trade, logistical, legal and financial complications and maintain a good corporate reputation.

South Korea's Russian crude imports in Q3 is estimated to fall by more than half from Q2 to 2 million barrels, while Japan has taken zero cargoes from Russia in the past two months.