- Refiners will source more oil from the Middle East, Africa and the Americas.
- Crude prices and transportation costs will increase due to the change in supply.
- China’s independent refiners will cut production if ESPO’s supply hits.
Chinese and Indian refiners will source more oil from the Middle East, Africa and the Americas, pushing up prices and freight costs, as new US sanctions on Russian producers and ships curb the supplies to Moscow’s main customers, traders and analysts said.
The US Treasury on Friday imposed sanctions on Russian oil producers Gazprom Neft and Surgutneftegas, as well as 183 ships carrying Russian oil, targeting revenues that Moscow used to finance its war with Ukraine.
Many tankers have been used to ship oil to India and China, as Western sanctions and price caps imposed by Group of Seven countries in 2022 have shifted Russian oil trade from Europe to Asia. Some tankers have also shipped oil from Iran, which is also subject to sanctions.
Russian oil exports will be seriously affected by the new sanctions, which will force China’s independent refiners to reduce refining output in the future, two Chinese trade sources said. The sources declined to be named because they are not authorized to speak to the media.
The expected disruption to Russian supplies pushed global oil prices to their highest level in months on Monday, with Brent trading above $81 a barrel.
Of the newly sanctioned vessels, 143 are tankers that carried more than 530 million barrels of Russian crude last year, or about 42% of the country’s total seaborne crude exports, said Matt Wright, senior cargo analyst. at Kpler, in a note.
Of these, about 300 million barrels were shipped to China, while most of the rest went to India, he added.
“These sanctions will significantly reduce the fleet of vessels available to deliver crude from Russia in the short term, resulting in higher freight rates,” Wright said.
A Singapore-based trader said designated tankers had shipped nearly 900,000 b/d of Russian crude to China over the past 12 months.
“It’s going to fall off a cliff,” he added.
In the first 11 months of last year, India’s imports of Russian crude rose 4.5% year-on-year to 1.764 million bpd, or 36% of India’s total imports. China’s volume, including pipeline supply, increased 2% to 99.09 million metric tons (2.159 million bpd), or 20% of its total imports, over the same period.
Chinese imports mainly consist of Russian ESPO Blend crude, sold above the ceiling price, while India mainly buys Urals oil.
Vortexa analyst Emma Li said exports of Russian ESPO Blend crude would be disrupted if sanctions were strictly enforced, but that would depend on whether US President-elect Donald Trump lifts the embargo and also whether China’s recognition of the sanctions.
Alternatives
The new sanctions will push China and India back into the compliant oil market to seek more supplies from the Middle East, Africa and the Americas, the sources said.
Spot prices for Middle East, African and Brazilian grades have already risen in recent months due to growing demand from China and India, while supplies of Russian and Iranian oil have tightened and have become more expensive, they added.
“Prices of Middle Eastern grades are already increasing,” said an Indian oil refining official.
“There is no choice but to go for Middle East oil. Perhaps we will also have to go for American oil.”
A second Indian refining source said sanctions on Russian oil insurers would prompt Russia to price its crude below $60 a barrel so Moscow could continue to use Western insurers and oil companies.
Harry Tchilinguirian, head of research at Onyx Capital Group, said: “Indian refiners, the main buyers of Russian crude, are unlikely to wait to find out and will scramble to find alternatives to Middle East and Middle East crude. Atlantic basin linked to the dated Brent. .
“The strength of the Dubai benchmark can only increase from here on as we are likely to see aggressive bidding for February, loading cargoes like Oman or Murban, leading to a tighter Brent/Dubai spread “, he added.
The Biden administration last month designated more ships handling Iranian crude in anticipation of tougher measures expected from the incoming Trump administration, leading the Shandong Port Group to bar sanctioned tankers from calling in its ports in the eastern province of China.
As a result, China, the main buyer of Iranian crude, will also look to heavier oil from the Middle East and will most likely maximize its purchases of Canadian crude from the Trans-Mountain Pipeline (TMX), Tchilinguirian said.