In its sanctions campaign against Russia, the United States and its allies are doing everything possible to spare energy shipments and keep economies buzzing and voters warm.
The oil market went on strike anyway. Acting as if energy is in the crosshairs of Western sanctions officials, refiners are reluctant to buy Russian oil and banks are refusing to finance shipments of Russian raw materials, according to traders, oil executives and bankers.
The self-imposed embargo threatens to drive up energy prices globally by removing a source of oil from a market that was already tight even before President Vladimir Putin attacked Ukraine. Russia, at war and starved of revenue with its financial system in turmoil, is taking extreme measures to convince companies to buy its most precious commodity.
Until refiners and banks are sure they won’t fall under complex restrictions in different jurisdictions, they won’t do business with Russian oil, traders and other market participants say. Market participants are also concerned that measures directly targeting oil exports could land as fighting in Ukraine escalates.
“It’s going to make trading with Russia very complex,” said Sarah Hunt, a partner at law firm HFW who works with commodity traders, of the sanctions set for Monday. “These sanctions against Russia will have an incredible effect on global trade and trade finance.”
Brent crude futures, the benchmark in international energy markets, rose more than 7% on Tuesday to nearly $105 a barrel. In a sign that demand for Russian oil has evaporated, prices for flagship Urals crude have moved in the opposite direction.
Traders are offering Urals at very favorable prices – up to $18 a barrel below the price of Brent – and even then they are not finding buyers. A drop in the price of Espo, a popular Russian crude grade in Asia, suggests refiners in Japan and South Korea are taking a break from buying alongside those in Europe and the United States.
“The market is starting to crash,” said one person from a major commodity trading house.
Companies such as Vitol and Trafigura Group Pte. Ltd.—one of the largest independent oil traders in the world—holds Russian oil purchased under long-term agreements. They were unable to sell on Tuesday, people familiar with their operations said.
In Europe, Swedish refiner Preem AB and Finland’s Neste Oyj say they have stopped buying Russian oil and replaced it mostly with purchases of northern European oil. Valero Energy Corp.
a Texas-based refining company has suspended all future purchases of Russian oil, people familiar with the decision said.
For now, Russia is exporting about as much oil as it did on the eve of Thursday’s invasion. But those flows, based on sales made before the war, will slow significantly in the coming weeks once shipments are delivered, traders and analysts say.
Russia was considered to have the upper hand energetically in its confrontation with the West. In times of peace, Russian crude oil and other varieties of oil are transported to refineries in Europe, the United States and Asia. There it is converted into fuels that power car fleets and other forms of economic activity.
Europe is particularly dependent on Russia for a large part of its energy needs, both for natural gas to heat homes and power power plants, but also for oil which travels through pipelines directly to refineries in Germany. , Poland, Slovakia and elsewhere. Part of this oil transits through Ukraine.
The importance of Russia’s energy industry – an exporter of around 7.5% of the world’s oil – to the global economy has led Western governments to exclude oil and gas from their sanctions. By removing some, but not all, banks from the financial system’s messaging infrastructure, Swift, the United States and others left merchants free to pay for oil and gas.
As Russian crude prices fell last week, Indian companies sucked around seven million barrels of oil from the Urals, according to people familiar with the matter. Even there, however, companies are taking steps to limit the risk of penalties.
On Monday, Indian Oil Corp. sent a letter to crude traders saying it would only buy Russian oil if delivery was included, according to a person familiar with the matter and a document seen by The Wall Street Journal. In the document, the Indian refining giant said it would no longer buy two grades of Russian oil, as well as a blend of Kazakh oil, if it were to take responsibility for oil transportation. Indeed, some shipping companies are hesitant to load Russian crude, the person said.
Indian Oil did not immediately respond to a request for comment.
Russia is moving quickly to bolster demand for its oil, an especially vital source of dollars now that the country’s foreign currency reserves have been frozen by the United States and its allies.
Companies including state-aligned giant Rosneft Oil Co.
have moved from offering oil on a so-called FOB basis, in which buyers repair their own vessel and finance and insure shipping, traders and oil executives say. Instead, they offer oil on what is known in industry jargon as a CFR base.
According to this model, Rosneft would use government-owned Sovcomflot shipsit’s
fleet and deliver the oil to the buyer’s doorstep in exchange for cash, meaning the buyer doesn’t have to worry about transportation, trade finance or insurance. The buyers are rejecting the proposal, said an oil industry executive and a Middle Eastern oil trader.
Rosneft did not respond to a request for comment.
China has scooped up more Urals, which are normally mainly sold in European markets. Two large tankers, including one chartered by China Petroleum & Chemical Corp.
, or Sinopec, are en route to the Chinese ports of Ningbo and Zhanjiang and are expected to arrive in late March, said Kevin Wright, chief oil analyst at trade news firm Kpler. A Sinopec spokesperson did not immediately respond to requests for comment.
Still, traders said China hasn’t sucked up cheap barrels like it did when global oil prices crashed at the start of the pandemic. Beijing is toeing a cautious diplomatic line on the war, abstaining in a United Nations vote on condemning the invasion last week.
A challenge facing Rosneft and other producers: Governments including the UK and Canada are banning Russian tankers. On Monday, one such ship was forced to cancel an arrival in Scotland after the UK instituted its ban.
Many Western shipping companies have grown wary of sailing in the Black Sea south of Ukraine and are facing increased insurance rates for operating near a war zone.
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Banks that grease the wheels of international trade refuse to finance Russian commodity deals. Lenders including ING Groep NV, Société Générale HER
and Credit Suisse Group AG
do not issue letters of credit – a form of trade finance – for Russia’s oil and other natural resources, according to people familiar with the matter.
Spokespersons for Societe Generale and Credit Suisse declined to comment. An ING spokesperson said the bank would not lend to Russian entities at this time, including those used to fund commodity trading.
“The major issue now is payment terms,” said Igho Sanomi, founder of energy trading company Taleveras. “It became very difficult.”
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