Explanation: when the EU embargo arrives, where will Russia sell its crude oil?

Models of oil barrels are seen in front of the sign displayed ‘stop’, the colors of the EU and Russia flag in this illustration taken March 8, 2022. REUTERS/Dado Ruvic/Illustration

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MOSCOW, Sept 23 (Reuters) – Russia has increased oil shipments to Asia since Europe imposed sweeping sanctions, but has yet to redirect more than a quarter of its crude exports out of Europe – or about 1.3 million barrels a day – when a total oil embargo hits in December. Russia exports about 20 million tonnes of crude per month – around five million barrels per day (bpd) – via several routes, including the Druzhba pipeline to Europe and others to Asia.

In August, Russia’s total exports through European ports and the Druzhba pipeline amounted to 12.05 million tonnes, of which around 5.5 million tonnes (1.3 million bpd) were shipped to countries that will stop importing Russian oil from December 5.

Russia needs to find new buyers for this rough, which could require cheap prices and special terms, while facing more expensive logistics to deliver to more distant destinations, traders said.

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“Russian oil from the Urals has always been a quality for Europe. Now reaching new markets means shipping cargo outside of Europe amid growing concerns about transportation costs, insurance and timelines,” said a trader on the Russian oil market.

The United States and the European Union are also working on a Russian oil price cap, arguing that it will help reduce Moscow’s revenue while keeping global energy prices low.

Moscow has said it will not sell oil to countries that impose a cap and traders say they don’t see the measure working.

“It is very unlikely that Russia will work with a price cap, it makes no sense for Moscow, both politically and economically. It is much easier for it to negotiate private agreements than to publicly commit to a Western-dictated price cap,” said another trader involved. in Russian oil trading told Reuters.

Russia exported 8.85 million tonnes of Urals oil in August from its European ports, of which India, China and Turkey – which are not expected to join the embargo – bought around half, while the rest went to Europe. Russia also supplies Europe with around 3.2 million tonnes of oil per month through the Druzhba pipeline. The route is technically excluded from the embargo as Hungary, Slovakia and the Czech Republic want to continue to source supplies there.

But the main buyers of Druzhba – Germany and Poland – want to stop purchases from 2023, which means that about two million tons per month will have to find new buyers.

NEW WAYS

Rerouting oil from Druzhba will be a difficult task, as Russian oil ports have limited export capacity and sellers will have to arrange more tankers, traders said.

Russia cannot redirect large quantities from the Urals to its ESPO (East Siberia Pacific Ocean) pipeline, which is already pumping near capacity. This makes shipments via Europe and the Suez Canal the only possible routes for Urals crude to Asia.

Even if Moscow offers more favorable terms, India and China are unlikely to be able to buy much more Russian crude as they have several long-term contracts with rival producers, such as Saudi Arabia. and the United Arab Emirates.

“Russian companies are already offering discounts, shipping and insurance coverage, payment options and other perks to retain buyers,” a source from an Asian oil trading company said.

Russian companies will also have to change the way they sell rough.

Asian oil markets have a much earlier trading cycle than the European market: since mid-September, Asian buyers have been trading December loadings, while Europe is still pricing October loadings.

To avoid relying exclusively on China, India and Turkey for its sales, Russia has tried to woo smaller players, traders said. Sri Lanka has said it will start buying oil from Russia, but has only bought around 300,000 tonnes from the Urals so far this year, according to Refinitiv Eikon data. Cuba bought 200,000 tons from the Urals this year. “Small players are certainly not enough for Russian oil to be absorbed. China is the last resort for Russian oil or Moscow will eventually have to cut production,” said a third trader involved in the Russian oil market.

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Reporting by Reuters journalists Editing by Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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