Explainer: where will Russia sell its crude when the EU sanctions come?

Models of oil barrels are seen in front of the sign “Stop” in this illustration taken on March 8, 2022, the colors of the flags of the European Union and Russia.

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MOSCOW, Sep 23 (Reuters) – Russia has increased oil shipments to Asia since Europe imposed sweeping sanctions, but still needs to re-route more than a quarter of its crude exports away from Europe – Or about 1.3 million barrels per day — when a full oil embargo hit in December. Russia exports about 20 million tonnes of crude oil per month – about five million barrels per day (bpd) – through several routes, including the Druzhba pipeline in Asia to Europe and others.

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

Traders said Russia would have to find new buyers for the crude, which could require cheaper prices and special conditions, while also facing costly logistics to transport it to more remote destinations.

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A trader in the Russian oil market said, “Russian Ural oil has always been a grade for Europe. Now freight has to be shipped outside Europe amid growing concerns about transportation costs, insurance and time to reach new markets. “

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

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

Another trader said, “The prospect of Russia working with a price range is very low, it makes no sense for Moscow politically and economically. Publicly for some price range set by the West. It’s a lot easier to negotiate private deals than to commit.” told Reuters in the Russian oil trade.

Russia exported 8.85 million tonnes of Ural oil from its European ports in August, of which India, China and Turkey – which are not expected to join the embargo – bought about half, while the rest went to Europe. Russia supplies about 3.2 million tonnes of oil per month to Europe via the Druzhba pipeline. The route is technically excluded from the ban as Hungary, Slovakia and the Czech Republic continue to buy from it.

But Druzhba’s top buyers – Germany and Poland – want to stop buying from 2023, which means about two million tons per month will need to find new buyers.

new routes

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

Russia cannot re-route the Urals in large quantities to its East Siberia Pacific Ocean (ESPO) pipeline, which is already pumping close to capacity. This makes shipment through Europe and the Suez Canal the only possible route for Ural crude to Asia.

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

“Russian companies already offer discounts, shipping cost and insurance cover, payment options and other facilities to keep buyers engaged,” said a source at an Asian oil trading company.

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

Asian oil markets have a much earlier trading cycle than the European market: Asian buyers are trading December-loading cargo as of mid-September, while Europe is still pricing October loading.

Traders said that to avoid relying exclusively on China, India and Turkey for sales, Russia has tried to woo smaller players. According to data from Refinitiv Eikon, Sri Lanka has said it will start buying oil from Russia, but has bought only 300,000 tonnes of Ural so far this year. Cuba has bought 200,000 tonnes of Urals this year. “Small players are definitely not enough to absorb Russian oil. Is China the last resort for Russian oil or Moscow has to cut production eventually,” said a third trader associated with the Russian oil market.

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Reporting by Reuters Journalists Editing by Mark Potter

Our Standards: Thomson Reuters Trust Principals.

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