Russia is selling its crude oil at record discount rates as the country prepares for the possibility of tough sanctions from Western nations following the beginning of its war with Ukraine.
Bloomberg reporters Sherry Su and Alex Longley noted that this is the deepest discount for Russian oil in at least 11 years, if not longer. Despite the significantly cheaper oil price, there were no bids. A large tender that was put up for sale separately also went without being bid on. (Related: Germany halts Nord Stream 2 pipeline project with Russia over Ukraine incursion, putting citizens at risk of freezing.)
Singaporean commodities trading company Trafigura Group and Russian energy company PJSC Lukoil both tried to offer Urals crude with a $6.30 per barrel discount. Neither of their bids ended up getting sold.
Russian oil isn’t the only oil market being affected. Kazakhstan-owned Caspian Pilepine Consortium Blend oil, which harvests oil from Caspian Sea reserves, tried to trade oil with a discount of $1.50 per barrel.
Norway’s Johan Sverdrup oil, which is similar in quality to oil from the Urals and is often used as an alternative, has also started trading oil at a discount of around $1.50 per barrel as well.
“Russia-U.S. tensions over Ukraine have contributed to the collapse in Urals differentials,” wrote energy consulting company Facts Global Energy in a note. “It seems that after many European refiners went on a Urals buying spree in December/January, those that have a choice are now shying away from Urals.”
Companies with investments in Russian oil started offering discounts on Monday when Urals oil was offered at Dated Brent minus $4.60 per barrel. Analysts noted that this was the largest discount on Urals oil since the spring of 2020, when oil demand plummeted at the beginning of the global Wuhan coronavirus (COVID-19) pandemic lockdowns.
Traders avoiding handling Russian oil for fear of sanctions
The United States, the United Kingdom, Japan and the European Union have all announced sanctions against Russia and have warned of more sanctions to be passed in the coming days if the war continues. Because of this, oil traders are actively choosing to avoid trading in Russian crude for fear that they might face the consequences of violating the sanctions.
Igho Sanomi, founder of Nigeria-based energy trading company Taleveras, said he is expecting restrictions against Russia to be “very deep.”
“We’re expecting most European banks will pull out of financing any commodities from Russia. Letters of credit are being stopped, financing in general toward Russian commodities is being stopped,” he said.
“I hear that refiners are stepping back from buying Urals, and many shipowners are saying they are unsure if they will call at Russian ports – Black Sea or Baltic,” said one European refineries investor to S&P Global. Another trader from the Middle East reportedly told the outlet that “extreme events” like open conflicts did not happen very often but were very disruptive to the market.
Reluctance to purchase Urals oil also comes from the fear many traders have of the oil they purchased being disrupted en route, especially if the ongoing conflict in Ukraine spills over into the Black Sea. Some shipowners have told media outlets that they are extremely cautious about traveling to terminals in the region.
S&P Global Platts, which organized the bid for Urals oil at a discount of $11.60 per barrel, remarked that it will not publish bids, offers, trades and market values for oil loading in the Black Sea.
But if Platts does end up selling oil at that steep discount, it may do at a massive loss as foreign rates from Russia’s Baltic Sea terminals have soared since the beginning of the conflict, according to the Baltic Exchange in London.
“Buyers are looking to source crude from safe suppliers,” said Lars Barstad, CEO of the management unit of Frontline Ltd., one of the world’s largest owners of supertankers. He added that the markets for supertankers are similarly reacting to the conflict and the increased rates out of the Black Sea.
Traders that used to rely on Russian oil are now looking for suppliers in the Middle East, West Africa and Brazil. Barstad has seen this development due to the rise in rates for chartering giant supertankers like the ones his company is renting out.
But financial analysts noted that the lack of trading partners with the West provides an opportunity for other potential trading partners to step in.
Financial analysts have noted that Russia’s sudden lack of trading partners with the West provides an opportunity for other potential trading partners to step in and buy Urals oil.
“The conflict will result in a significant shift in trade flows, at least temporarily, with less risk-averse Asian buyers stepping in to buy Urals and Russian products,” said Livia Gallarati, an analyst for energy consulting company Energy Aspects Ltd. “Which means Urals and products differentials have to correct lower to clear east.”
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