Oil trade patterns will be radically reshaped by the Russia-Ukraine war

Last week, France’s TotalEnergies chartered a tanker to deliver oil to the UK. A normal enough transaction — but the awkwardly named Moscow Spirit will load Murban crude from the UAE port of Jebel Dhanna, the first such consignment for two years. The move, required to reduce imports from Russia, is one small sign of oil trade patterns that will be radically reshaped by Russia’s war in Ukraine . The UAE has typically sent little oil to Europe. In 2020, the Emirates sent just 0.3 per cent of its crude exports and 6 per cent of its refined products, such as petrol and diesel, to the continent. The pattern holds for the Middle East in general, with just 16 per cent of the region’s oil exports going to Europe compared with 77 per cent to Asia. Apart from Iraq, which has an outlet from the Mediterranean through Turkey, and Saudi Arabia, whose sheer size means it has to target all available markets, producers in the Middle East barely sell to Europe at all. Russia is the converse: 53 per cent of its oil goes to Europe and just 33 per cent to Asia, despite the East being a much larger and faster-growing consumer. But this is already changing. The EU will propose a phased ban on Russian oil imports that would become 100 per cent by the end of this year, Bloomberg reported last week. Alternative measures, such as a hefty tariff or tax, a price cap or the use of an escrow account, don’t appear to be on the table. This will make the prohibition even more disruptive. Natural gas is strategically more crucial. It cannot easily be diverted, locking the blocs into mutual interdependence. But oil revenue lubricates the war machine. Three quarters of Russian earnings from exports are oil; just 10 per cent from gas. The Kremlin’s move to cut off gas to Poland and Bulgaria, with others no doubt following, demand a European counter. Even in the absence of a formal ban, traders and refiners of oil in Europe, such as Shell, BP and ExxonMobil, have already stopped buying Russian crude because of fears over reputational and sanctions exposure. The UK, US, Canada and Australia, albeit never big purchasers, have outlawed oil imports from the country. Western restrictions will increasingly target financing, trading and shipping of Russian energy. At the moment, the prospect of “secondary” sanctions on non-European customers, such as those the US has used to go after buyers of Iranian oil, looks extreme, but things could change. The expectation is that most Russian oil exports will reorient to Asia, particularly China and India — but that may not be so easy. The quality of the predominant Russian blend, Urals, is similar to the main Middle Eastern crudes, but it contains more metal contaminants, which not all Asian refineries are equipped to handle. More serious problems are logistics and marketing. Most of Russia’s western oil exports go through four points: the far northern port of Murmansk, the Ust-Luga and Primorsk terminals on the Baltic, the port of Novorossiysk on the Black Sea, and the somewhat ironically titled Druzhba (“Friendship”) pipeline that crosses Belarus and Ukraine on its way to serve Poland, eastern Germany and central Europe. Druzhba would become essentially useless in the event of a European ban. Shipping in the Black Sea now encounters heavy war risk insurance premia. Russian oil has typically been carried on medium-sized tankers to Europe, while voyages to Asia would be five or six times longer, tying up much of the fleet. So up to 4 million barrels per day of Russian oil would have to find a home in Asia, while the Middle East is mostly called on to fill the gap in Europe. Even before the war, in January, Saudi Aramco, the world’s largest oil-exporting company, bought a stake in the Gdansk refinery, Poland’s second largest, and agreed to boost supplies to the country. This essentially eliminated Poland’s dependence on Russian crude. Now, Germany has reached an agreement with Warsaw to use its ports and pipelines, supplying eastern Germany which had previously had no alternatives. Meanwhile, leading Asian buyers have long-standing relationships with their Gulf suppliers and would be reluctant to switch over entirely to Russian shipments of doubtful reliability and longevity. Bloomberg’s oil strategist Julian Lee suggested that the Gulf’s joint-venture refineries in countries such as China, Malaysia and Pakistan could swap their usual diet for Russian barrels. But this may be overcomplicating things. Middle Eastern countries could buy heavily discounted Russian oil for their domestic refineries — possibly after some reconfiguration — and hence export more of their own crude production to Europe. The region’s 10 million bpd of refining capacity features a number of mega-scale new or upgraded plants including in Kuwait, Saudi Arabia, Oman, Bahrain and the UAE’s Ruwais. Although it lacks suitable refineries at home, Qatar is in a particularly curious situation through its 18.46 per cent equity stake in state-owned Rosneft, by far Russia’s biggest oil producer, which, in turn, owns almost half of Nayara, operator of India’s second-largest refinery. Flows would reshuffle for commercial and logistical imperative, rather than political motivations. It, too, may not be a permanent state of affairs — either through an end to the war and sanctions, or through a diminution in Europe’s oil requirements as it pushes to phase out petrol and diesel vehicles by the mid-2030s. Previous tectonic energy market shifts, such as the closure of the Suez Canal in the 1956 and 1967 wars, the nationalisation of most Middle East oil production and the explosive rise of Chinese consumption, reshaped oil flows — sometimes instantly, more often over years. This time will be radical, and quick. Robin M. Mills is chief executive of Qamar Energy and author of 'The Myth of the Oil Crisis'

Oil trade patterns will be radically reshaped by the Russia-Ukraine war

Even in the absence of a formal ban, traders and oil refiners in Europe, such as Shell, BP and ExxonMobil, have already stopped buying Russian crude