Russia Sends Oil to China at Europe's Expense as Trades Upended
(Bloomberg) -- Europe’s oil refineries are increasingly missing out on Russian crude as the world’s biggest energy producer directs more and more barrels by pipeline to China.
Russia will ship an average of 19 percent less crude through its main ports on the Baltic and Black Seas in the first five months of 2018 compared with a year earlier, according to loading plans obtained by Bloomberg. Meanwhile piped flows to China soared 43 percent in the first three months, the most recent data from state operator Transneft PJSC show.
The shift is likely to leave Europe’s refineries looking replacement for crudes, according to Alan Gelder, vice president for refining, chemicals and oil markets at Wood Mackenzie Ltd. in London. The continent imports more crude from Russia than any other nation, figures from ITC Trade Map show. The replacement crude is likely to come from Middle East cargoes that would previously have gone to Asia as well as U.S. supply.
“It’s almost like a crude shuffling,” Gelder said. “The Middle East will have less medium-sour crudes going to Asia because of the growth in Russian volumes, so then they would push those barrels into Europe.”
For the time being, the cuts to Russian crude flows aren’t showing up in prices -- quite the opposite -- thanks to maintenance work at refineries in Europe that turn the oil into fuels. Russia’s Urals crude has been trading near 4-year lows in Europe thanks to that maintenance, as well as an increase in crude flows from the U.S.
However, the lost Russian cargoes are being felt in tanker markets, which had already been beleaguered by an oversupply of ships and OPEC supply cuts that reduced the amount of oil transported. Freight costs to move Russian supplies from its key Black Sea port of Novorossiysk into the Mediterranean Sea averaged less than $1 a barrel so far in 2018, putting them on course for the weakest annual average since at least 2009, data compiled by Bloomberg show.
It’s the same picture for cargoes loaded in the Baltic Sea, home to the Primorsk terminal that’s still the nation’s biggest crude-export facility. The move doesn’t bode well for the longer-term outlook for ships in the region, said Jon Chappell, a shipping analyst at Evercore ISI.
“The tanker sector is getting hit in every region,” he said. “If Russia were to have more and more cargoes going to pipelines instead of ports, then as the industry starts to recover it may be a segment that’s weighed down by the fundamental shift in demand.”
China imports the bulk of Russian oil via pipes and seaborne shipments from the eastern ports of Kozmino, De-Kastri and Prigorodnoye. A second conduit between the two countries began operations on New Year’s Day, doubling China’s ESPO crude import capacity to 30 million tons annually, or about 600,000 barrels a day.
Total pipeline flows to China jumped 43 percent to about 750,000 barrels a day in the first quarter, the Transneft data show. Those via Russia’s European ports -- most of which end up in Europe -- will fall 19 percent to 1.86 million barrels a day through May, the loading programs show.
As it increasingly flows east, Russian oil will be replaced by a mixture of Middle Eastern and U.S. crude, according to Gelder. Exports from America to all destinations rose to a record of 2.3 million barrels a day last week and a flood of cargoes to Europe are expected in the coming months. That could be needed to support supplies of gasoline -- a product usually produced by European refineries -- when demand reaches its peak in the summer.
“U.S. tight oil could fit the need for summer driving season,” Gelder said. “In the late spring and into summer as we’re starting to see gasoline strength, Europe would then be the logical home.”
With assistance from Julian Lee.To contact the reporters on this story: Alex Longley in London at email@example.com; Bill Lehane in London at firstname.lastname@example.org. To contact the editors responsible for this story: Alaric Nightingale at email@example.com Brian Wingfield.
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.