One of the long-term consequences of the Russia-Ukraine conflict
and ongoing war for more than 100 days is the restructuring of export flows
in the global oil market.
This will have direct consequences for Middle Eastern
players, forcing them to choose whether to compete with Russia and each other
or continue to coordinate their efforts.
In spite of the rumors that Russia might be suspended from
the OPEC Plus deal, the current cooperation between Moscow and other oil
producers may still survive and continue beyond September 2022, when the
agreement on production cuts expires, although the chances of this happening
are decreasing.
There are ongoing concerns about the stability of the oil
market and keeping the cartel together is the only way to manage it. Even
though its production capacity is declining, Russia remains an important player
and one whose role in Asia, a key consumer market for Gulf oil producers, could
potentially increase.
If there were questions during the earlier weeks of the
conflict in Ukraine about whether the threat of sanctions and logistical
bottlenecks would allow Moscow to redirect its oil exports from Europe to Asia,
by now the answer is clear: yes, it can.
In the case of oil terminals in the west of Russia, the
volume of oil supplies going to the East increased from 0.14 million
barrels per day (mbpd) in January 2022 to 0.90 mbpd in April and 0.55 mbpd in
May.
Putting aside its initial fears and hesitation, India turned
out to be the main buyer of extra volumes of Russian oil. From almost zero in
February, its imports rose to 0.9 mbpd in May; in previous years its average
imports did not exceed 0.2 mbpd.
China quickly followed India’s example. Interest in
additional supplies emerged not only from traditional buyers of Russian
hydrocarbons among China’s independent oil refining companies (so-called
teapots), but also from major Chinese players affiliated with the government,
which had initially said they would not be interested in buying Russian oil due
to the threat of sanctions.
However, as statistics show, after an initial decline in
Russian oil exports to China in year 2022 from 1.7 mbpd in January to 1.4 mbpd
in February, volumes began growing again, reaching 1.6 mbpd in April and almost
2mbpd in May.
In April and May of this year, Russian seaborn oil supplies
to China reached their highest levels since March 2020, exceeding one
mbpd, against an average of 0.8 mbpd in 2021. Moreover, demand for Russian
oil is not limited to China and India, with Indonesia and Sri Lanka both
showing an interest as well.
Several factors support the growth of Russian oil supplies
to Asia. The most important one is the unprecedented discounts that Russian
producers are offering their customers to compensate for the potential risks
and costs of purchasing politically toxic oil. According to various
estimates this discount may be as high as US$35 per barrel, which attracts
profit-minded refiners that have already significantly boosted their margins
and countries that are experiencing economic difficulties and cannot afford to
purchase oil at the high official price.
Russia's partial loss of the petrochemical market may also
benefit the oil trade: Russian oil may be in demand as a feedstock in
those countries that have tried to replace Russia and increase their exports in
the markets for fuel and other petrochemical products.
Thirdly, Moscow should be grateful to Tehran, which
previously allowed Asian consumers to develop a number of techniques to
circumvent sanctions to buy Iranian oil. These same techniques are now being
used by Beijing and others to adjust their oil trade with Russia in light of
the new realities.
At the same time, in terms of the oil volumes available,
their quality, and in some cases their greater proximity, Russian hydrocarbons
appear be more attractive for Asian consumers than Iranian ones.
Finally, Moscow is ready to pay the costs associated with
the supply of oil to Asian markets and quickly learns from its mistakes. This
extends not only to its willingness to provide discounts, but also to take on
both the risks and costs associated with paying for ship insurance, owning its
own tanker fleet, using low-tonnage carriers, as well as trading oil "from
tanker to tanker." Ultimately, despite all of the associated costs,
today's high oil prices allow Moscow to remain in profit.
However, there are also losers from the current market
dynamics, including oil producers in the Gulf. Iran was the first to suffer.
Russia challenged its position in the gray market for sanctioned oil.
As already noted, Russian hydrocarbons have a number of undeniable advantages
for China, including the fact that the restrictions on Russian oil are not as
strict as those on Iranian oil.
It is difficult to judge Iran's losses, since there is no
accurate accounting of how much of its oil bypasses sanctions. However, the
Iranians’ pained reaction to the inflow of Russian oil certainly says something
about how much income they have lost. Moreover, it is not just about oil but
also petrochemical products. For example, Russian liquefied petroleum gas
(LPG) has become a significant competitor to Iranian LPG in Turkey,
Pakistan, and Afghanistan.
In the Indian market, Russian oil has challenged the
positions of other Gulf producers, including the UAE, Saudi Arabia, and
especially Iraq. By May 2022, all three countries had lost a substantial volume
of supplies to Moscow.
Russian oil may also present a threat to Saudi interests in
the Chinese market, although so far the volume of Saudi supplies to China has
been growing steadily. However, according to some experts, Oman will be
the main victim of the influx of Russian Urals oil to China.
All of these factors have forced the Gulf countries to
reconsider their pricing policies. Thus, in April, Iraq was the first to cut
its oil prices. In May, other Gulf producers followed suit. Interestingly,
Russian prices turned out to be more influential than other factors
affecting the market, such as the possibility of a gradual easing of quarantine
restrictions in China that in theory should have pushed oil prices upward.
The bad news for the Gulf states is that this situation is
becoming the new reality. Even though the situation may have been created
artificially, when some countries, for political reasons and contrary to their
economic interests, voluntarily refused to purchase Russian oil, its impact is
all too real, creating supply shortages in some markets and potential surpluses
in others.
There have been similar precedents before, but they were
more localized in nature, as in the case of Venezuela or Iran, and the
conditions were slightly different.
In case of Russia, the restrictions on oil purchases are
being used against one of the main players in the market, affecting a
significant amount of oil when there is already an existing undersupply.
Moreover, this trend is obviously long term.
The European desire to avoid dependence on Russian oil is
unlikely to change. Russia will also not be able to immediately redirect all of
its oil to Asia and find buyers for it, as evidenced by the growing volume of
Russian oil reserves accumulating in storage and on tankers. This means that,
at least in the medium term, Moscow will have certain reserves of hydrocarbons
that it can use to affect the market’s balance.
Russian oil will also be a wild card as part of it is now
sold secretly, under other names, thus making it difficult to track. There are
already rumors about schemes Russia is using to channel its oil exports to
third countries through the Gulf states, Asia, and even the EU.
The war unleashed restructuring of oil market flows and
created new sources of uncertainty that will last at least until the conflict
ends and relations improve. That is not likely to happen soon and the market
seems to be beginning to recognize the long-term nature of the current
situation.
Gulf producers are no longer silent about their problems and
are obviously unhappy that political factors have created a serious imbalance
in oil exports flows — a point clearly articulated by UAE Oil
Minister Suhail al-Mazroui in early May.
Gradually, everyone seems to have come to the same
conclusion, Sanctioned Russian oil is becoming a new reality in Asian oil
markets and it must be reckoned with. Some players, like Iran, are trying to
find a way to co-exist with Russia, hoping to divide the market for
"gray" oil.
Others, like Saudi Arabia and its partners, can presumably
expect to work with Moscow within the framework of OPEC+, although some cartel
members are in favor of greater competition with Moscow for oil markets. No one
has doubt that Russia will remain an important player in the oil market, at
least for the foreseeable future.
