Even last year, the EU countries accounted for more than half of Russia's oil exports, so the ban on supplies seems alarming for both Russia and the West. But the oil trading market is a rapidly adapting system. This is partly due to the very physical properties of the product: it is easier to transport oil than gas, and at a convenient price situation, this can be done anywhere in the world.

Until recently, this statement was also true for Russian oil. The question remained only in the price and its quality indicators. But with the embargo on oil imports from Russia, a new variable has been added to the equation that a trader decides when selling, toxicity.

Stream redirection

The global market (and Russian companies in particular) has already adapted to the new conditions. First of all, trade flows are changing.

Germany and Poland continue to buy oil through the Druzhba pipeline, and sea shipments of Urals still go to European ports, but their share is decreasing every month. According to Rystad Energy, imports of Russian oil to Europe in the period from March to May decreased by 554,000 barrels per day compared to January-February. At the same time, imports by Asian refineries (including China) increased by 503 thousand barrels per day.

The global market has already adapted to the new conditions. First of all, trade flows are changing.

From the beginning of the war, from March to May, imports of Urals oil to Asia increased by 347% compared to 2021, to India - by 658%, to China - 205%, as a result of which Russia became the largest oil supplier to China .

However, already now we see that the first months of relatively smooth unhindered trade of Russian oil in Asia have come to an end, and domestic companies have yet to compete for their share in the new market. Saudi Arabia and Iran, for which China and India are key buyers of raw materials, naturally became concerned about the emergence of large volumes of cheap Urals and decided to also reduce prices for their varieties for Asian buyers. As a result, purchases of Urals by China and India have noticeably decreased this month.

Market participants say that Russia may even try to increase the capacity of the East Siberia-Pacific Ocean oil pipeline, through which raw materials are delivered to Asia and, in particular, to China. This can be done with the help of additives - substances that are added to the fuel in small quantities to improve their performance properties. According to the analytical agency Vortexa, supplies via this route could increase by 100,000-200,000 barrels per day.

Oil exports through the Far Eastern port of Kozmino, where another branch of this oil pipeline ends, have also grown steadily in recent months, rising to 900,000 bpd in June - although before the start of the war in Ukraine, it was below 700,000 bpd.

The Minister of Transport of Russia recently spoke about plans for dredging in the waters of the ports of Makhachkala, Astrakhan and Olya. Until recently, this direction was not in demand among Russian companies, but in the spring two shipments of oil were sent from Makhachkala. Typically, the port is used for transshipment of transit oil from Kazakhstan and Turkmenistan, which is then delivered via a pipe to Novorossiysk for further shipment. Now Russia is counting on the establishment of intra-Caspian routes - in particular, on the transit supplies of raw materials through the territory of Iran to India.

Trading companies themselves, which are engaged in the purchase and further sale of Russian oil and oil products, are massively opening offices in the Middle East - for example, in Dubai - in an attempt to evade European sanctions.

Covering up traces

Traders in personal conversations report the emergence of new trading companies that lengthen the chain of resale of raw materials and petroleum products. They also deal with intermediate transshipment and mix several varieties in one tanker, thereby "cleaning" the goods from risks and toxicity. Basically, it is precisely this scheme that is implied when it comes to the re-export of Russian oil.

Ship tracker data says raw materials from Russia are being transferred from tanker to tanker off the Azores and then sent in giant VLCC-sized ships to Asia. Such lots could be of interest to Asian buyers who want to comply with sanctions against Russia, but at the same time continue to buy raw materials at a reasonable price. According to a similar scheme, Russian oil is transshipped off Gibraltar, and less frequently off Greece and Malta.

Traders report the emergence of new trading companies that lengthen the chain of resale of raw materials and petroleum products.

But that scheme is likely to be curtailed in whole or in part when the embargo goes into effect in December — unless traders learn how to otherwise hide the origin of Russian oil. In early July, the European Commission has already provided clarifications on the embargo on Russian oil, according to which the ban will also apply to blends (mixtures of several varieties).

At the same time, the restrictions will not affect oil products produced from Russian raw materials. In this situation, countries that process oil from Russia will continue to receive their high margins against the background of the low cost of "toxic" raw materials and the high price of diesel fuel, for the production of which Urals is ideal.

Separately, one more scheme can be fixed: a country, which is also an exporter of energy resources, buys Russian oil or oil products at a discount and at the same time increases its own oil exports to Europe. This is how the countries of the Middle East can act, using fuel oil in generating electricity, especially during the hot months.

A gap in sanctions

Experts and politicians are concerned that the planned EU sanctions do not completely block the ways for European companies to interact with Russian oil. Thus, shipping companies from Greece, Malta and Cyprus, on the contrary, increased the volume of transportation of raw materials from Russia and will be able to continue shipping such consignments to third countries even after the embargo is introduced, since this is not limited to sanctions.

Shipping companies from Greece, Malta and Cyprus have increased the volume of transportation of raw materials from Russia

“If transport companies are also sanctioned, then the entire Greek fleet will change the flag,” one of the interviewed traders jokes.

However, according to him, the market already today, before the introduction of the “sixth package” restrictions, is feeling serious pressure from European regulators, as the sanctions have affected shipping insurance, and against this background, European insurers are already refusing to work with Russian cargo. However, the trader admits that while transporting Russian oil only adds work to employees of trading companies, it does not seem like an impossible task.

Among the difficulties that have already arisen in the sale of Russian oil, market participants name the lack of letters of credit to finance the transaction, the growing costs of insurance (Russian ports are regarded by insurers as a territory of hostilities), as well as the collapse of the insurance services market (in the European region, insuring a tanker is still is possible in the UK, but this possibility will disappear soon).

Much of the maritime insurance market falls under EU jurisdiction. And while there are alternatives in the smaller insurance markets of India, China and Russia, the sanctions restrictions will affect the tanker market. According to a Vortexa study , against the backdrop of sanctions in the insurance industry, new ways are emerging to avoid fixing the route of transportation of raw materials or a tanker entering a port, as well as ships that previously delivered raw materials from Iran and Venezuela began to be involved in the shipments of Russian oil.

Budget losses

If production and exports from Russia remain at current levels, the Russian economy will not experience serious discomfort in the short term.

The losses of the Russian budget from the imposition of the embargo are still a rather theoretical question, and the answer to it depends on what is recognized as losses. For example, according to Bloomberg analysts, the damage will be about $ 22 billion. This amount is made up of a discount to the Brent oil benchmark, with which Russian companies will be forced to sell their oil to Asia ($ 10 billion), as well as from "losses" from the cessation of supplies along the northern branch of the Druzhba oil pipeline to Poland and Germany (another $12 billion). In their calculations, analysts proceeded from the volume of exports in 2021 and the average price of Urals oil of $85 per barrel.

According to Bloomberg estimates, the loss of the Russian budget will amount to about $22 billion

Nevertheless, in real life, today Russia does not lose, but earns. And the same Bloomberg notes that against the backdrop of high energy prices in the world, the revenues of the oil and gas sector in Russia in 2022 may reach a record $285 billion. Of course, gas prices have a significant impact on this situation, but so far everything is positive for Russia on the oil market. The average oil price since Russia invaded Ukraine has been $111 a barrel, up from $89 a barrel before the war. Even if we take into account that a fairly large share of Russian crude is subject to a discount to Brent of about $34 per barrel, the cost of oil sold from Russia exceeds $70 per barrel at a production cost of $15-45 per barrel, depending on the complexity of the project.

Today, Russia does not lose, but earns

According to International Energy Agency (IEA) estimates, despite the reduction in Russian oil supplies abroad by 250 thousand barrels per day to 7.4 million barrels per day, revenues from its sale last month amounted to $20.4 billion, an increase of $700 million due to rising oil prices. This is 40% higher than last year's average. Against the backdrop of an unprecedented strengthening of the Russian currency, budget revenues in rubles, on the contrary, decreased by 18% over the month, but this change can rather be called technical.

The idea of ​​a “price ceiling” proposed at the G7 summit for Russia is also not ideal, as long as Russia still has a key lever of pressure on the market – export volumes. Energy consumption is growing every year, and any reduction can be sharply perceived by the market. This year, world consumption should return to pre-Covid levels and grow by 3.36 million barrels per day. compared to last year, according to the latest OPEC forecast .

During the 1973 oil crisis, a 5% reduction in global supplies caused prices to triple. JPMorgan analysts have estimated that if Russia cuts production by 3 million barrels per day. the price will jump to $190, and at 5 million barrels per day. - up to $380. Since the beginning of the year, the level of production in Russia has fluctuated around 10-11 million barrels per day.

It is worth noting that the reduction in production for Russia itself will also not remain without consequences: if the wells are mothballed, the restoration of production will require investments several times more than the companies will spend on mothballing.

Delayed effect of sanctions

Judging by the results of the first months, neither today nor tomorrow sanctions and oil embargo will force Russia to stop the war in Ukraine. And even if Western countries manage to somehow reduce the flow of foreign exchange earnings of Russian energy companies, as long as the Russian army uses the resources it has.

But in the long run, sanctions could be disastrous for the Russian oil industry. The reason is technologies, materials, spare parts, licenses that are so needed in this competitive market. Already, company employees are complaining about the specific characteristics of Chinese analogues of German spare parts, which make it necessary to carry out preventive work at oil refineries more often.

An obvious huge loss for the exploration and production sector will be the departure of such global service giants as Schlumberger and Halliburton: Russian companies simply do not have such expertise. The entire oil strategy of Russia in recent years has been based on increasing the share of development of hard-to-recover reserves.

The situation is such that the share of traditional reserves that do not require the use of high technologies in their development is declining every year. And if Russian companies fail to somehow obtain the necessary expertise, oil production in the country will naturally begin to decline.