Listen: Russia’s oil market under pressure from tighter sanctions, refinery attacks

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Francesco Di Salvo: Hello, and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights. On March 17, Russia concluded its presidential elections, which confirmed another mandate for the incumbent President Putin. These elections came a little over two years after the beginning of the war in Ukraine, which saw Russia just in its aftermath on the receiving end of a multitude of oil sanctions and other measures which were all aimed at undermining Russia's war chest, including a price cap. Now the conflict is intensifying and more attacks are appearing on Russia's oil and infrastructure. And we're taking today a look at the wider picture at the ramifications to the global oil markets.

I'm Francesco Di Salvo. I'm the editorial director for Crude and Fuel Products in London. And I'm joined by three colleagues today. We have Max Lin, who is principal journalist, Luke Stuart, who is a price reporter looking at many crude oil markets including Russia's flagship Urals Market, and Elza Turner, who is a senior editor in the Oil team and closely looks at Russia. Welcome to you all. And Max, if I could start with you. We talked about the sanctions. We talked about them being in place into EU countries., And of course the price gap being a big measure that was again aimed at sort of curtailing this funding for the Ukraine war. How are Russia's exports functioning right now? Can you give us a bit of a view?

Max Lin: Yeah. Obviously, as you mentioned, Western countries, G7, the EU, have been imposing lots of sanctions on Russia's finance, energy sectors and then we also have a price cap regime, which actually came into force in December, 2022 and basically trying to keep Russian's crude sale price below $60 per barrel. But since then, based on our data, we are still seeing Russian crude exports near its pre-war level, fluctuating between 3 million barrels per day and 3.5 million barrels per day. So it look roughly the same. And it's basically because the Russian has been able to build a shadow fleet working with operators of very opaque ownership structure and use some state interest to build a large number of old vessels to carry Russian oil. So such kind of fleet has been carrying almost 70% of Russian crude exports in generally, and they are especially enjoying very high shares of Pacific exports like export grades and [inaudible 00:02:53].

But at the same time we are still seeing the rest, 30%, is carrying G7 fleet. And obviously the G7 fleet to stay in this trade, they will need to prepare more compliance documents, more hoops to jump through, but they can enjoy generally higher freight premiums to carry Russian oil. So lots of think tanks saying that there could be some breach of sanctions, but at the same time, there's another scenario where Russian could just want to sell some discounted barrels for G7 fleet to carry. It's probably will because they wouldn't want to be 100% rely on shadow fleet because those are just less maintained vessel and the old ships. There could be more risk for later cargoes.

Francesco Di Salvo: I see. Thank you, Max. And Luke, if I could turn to you then. Max alluded to these that were still happening, but obviously difficulties in accessing the freight and obviously discounts that are coming into play. So how have Urals prices then reacted to the enforcement of these Russian sanctions?

Luke Stuart: Yeah. So in 2023 Urals on an FOB [inaudible 00:04:06] basis reached a high of around $84 per barrel in September, according to Platts assessments, which is obviously well above the $60 per barrel price cap. The G7 stepped up their enforcement of these sections throughout the fourth quarter of 2023 to stop Russia from circumventing the price cap, which saw Urals retreat back to around $57 per barrel in September. The US, for example, announced sanctions on several shipping companies and a new rule was also introduced in February, 2024 by the EU and UK, which required shipping companies carrying Russian Oil to provide attestations with itemized costs of the crude on board, freight and insurance. Eurals fall prices have gradually been creeping up again through the first quarter, now trading at around $69 per barrel. S&P Global Commodities at Sea has reported that Russia has increased its reliance on vessels previously linked to the transport of sanctioned Iranian and Venezuelan crudes following the enactment of the recent sanctions.

Francesco Di Salvo: I see. Max, perhaps if I could ask you then, what is the mood then, not only in the oil markets, but of course again also in the political chanceries of the West. What is the feel around the price gap? Has it been a success or failure?

Max Lin: I think price cap, it has a dual goal. I mean, on one hand that it has to minimize the disruption to the global oil market because G7 does not want to create more pressures on inflation, but at the same time, you do want to limit Russians war chest against Ukraine war. So I mean, I would probably say it has a mixed degree of success. The US has been quite focused on the discount of Russian crude to native brand, and we see this indicator being fluctuating about US$15 per barrel at early December and it was around $19 in February and now it's around $70 per barrel. And the US saying because it was still selling at significant discount. So the price cap is a success.

But we are also hearing lots of counter arguments. It's just generally because eventually the Russians oil revenue will depend on flat price. So I mean, even if the discount, it's still significant, but now the Russian Urals is around $70 per barrel. So it's actually I'm making much more money compared to several months ago when the price of oil is much lower. It really depends on how you are looking at this.

Francesco Di Salvo: I see. Well, thank you, Max, for that. And Elza, let me turn to you. Financial measures aside, the war is very much in full force at this moment, and one of the things that we've seen more recently is an intensification of those drones attacks into the oil infrastructure. What's the latest on this?

Elza Turner: Hello, Francesco. The latest was an intensifying of the drone attacks, especially last week, probably in the run-up to the presidential elections. And we saw attacks taking offline main processing units at three big Russian refineries. Those are the Nizhny Novgorod, Syzran, which is part of the Samara refinery hub, and also Ryazan, which is a big producer in central Russia. So all of these refineries are more or less supplying central Russia, also the Volga region. They're very critical for providing sufficient product supply inside Russia. And those attacks immediately pushed up prices of oil products on the St. Petersburg exchange.

We have seen an increase of gasoline prices since the start of the year amid good retail margins, but also as retailers' tank farms are trying to stock up on product before the start of the driving season. And also people are buying because they still have the memory from last summer shortages when prices surged. They hit margins at the retail sector. I am talking about the independent retail sector of course, because with the oil majors and their networks, it's different story. So with good retail margins, demand has picked up. There are still delays in Russia for delivery of oil products along the railways because the railway infrastructure is not sufficient to take all the export cargos. I'm not talking just of oil products, but everything, grain, coal. Especially coal cargos have increased for exports to the east and so on.

The latest, so Russia had to impose a new export ban on gasoline, which sort of calmed the market briefly, but then these attacks came last week and prices have started surging again. Whether there will be shortages, the officials are keen to stress that there is enough supply, there are enough stocks, but of course buyers are not that certain. They want to be sure they have enough products. So that has caused a bit of a panic buying inside Russia.

Francesco Di Salvo: I see. And I guess that the attention is also turning to those export markets, for example, diesel of which Russia is a big exporter and used to be a dominant exporter going into Europe.

Elza Turner: Yes. There was a diesel export ban last year. And this is the export ban which really caused ripples in the world markets because Russia... Unlike gasoline, which is a very small export component in Russian oil products, diesel is quite a big one. Russian refineries have upgraded to produce more diesel, so they produce more or less sufficient gasoline to cover domestic demand, but they produce twice the amount necessary for domestic demand of diesel. So half of the production goes for export. So far there hasn't been any official indication that they will be producing a diesel export ban. However, people in the market are starting to suggest that maybe an export ban is necessary, especially as the spring planting works in the agricultural sector are starting or about to start and that typically boosts demand for diesel because agricultural machines work on diesel or gas oil.

But at the same time, oil producers are keen to avoid a diesel export ban because what happened last year with this ban is that they ran out of storage. They didn't have enough storage to keep the diesel they were producing. And eventually they had to either reduce runs or the government had to go back on the export ban. And that's what they did. They actually allowed some diesel exports in the end because otherwise the refineries were facing complete filled-up storage. Incidentally, what the government officials said recently when there were questions by local media about shortages and what will happen with the refineries that are offline, they said that yes, indeed that throughput is reduced, but this will mean that they can increase crude oil exports. So probably this is something that Luke and Max are seeing actually.

Francesco Di Salvo: Yeah. And then, Luke, quite aptly, we could turn the question then to you. What is the mood in the markets? Less processing capacity as Elza is saying? Potentially more crude oil than available for exports? What's the feeling in the market?

Luke Stuart: That's right, Francesco. So with the attacks which Elza referred to and the reduced downstream capacity in Russia, we could see more Urals crude being redirected towards the export markets, which of course has the potential to weigh on differentials amid a longer supply. It's difficult to put an exact number on the volume of Urals that we could see being redirected towards these export markets because it's also necessary to consider commitments made by Russia under the OPEC PLUS arrangements. At the last review of production quotas on March 3rd, Russia agreed to plan a crude out output cut of 350,000 barrels per day and an export cut of 121,000 barrels per day in April. This overall 471,000 barrels per day cut is set to last until at least June under the current agreement.

Francesco Di Salvo: I see. Very interesting. And no doubt we'll be watching this very, very closely as the situation unfolds. Well, thank you very much to Elza, Luke and Max for joining me in this conversation. Of course thank you to our listeners. This Platts Oil Markets Podcast episode was produced by Felix Fernandez in London.