A closer look: When the European embargo comes, where will Russia sell its crude oil?

Models of oil barrels seen in front of the banner displayed “Stop,” the colors of the European Union and Russia flags in this illustration taken on March 8, 2022. REUTERS/Dado Rovich/Illustration

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MOSCOW (Reuters) – Russia has ramped up oil shipments to Asia since Europe imposed sweeping sanctions, but still needs to reroute more than a quarter of its crude exports away from Europe – or about 1.3 million barrels per day – when a full oil embargo was imposed in December. Russia exports about 20 million tons of crude per month – about five million barrels per day – via several routes, including the Druzhba pipeline to Europe and another to Asia.

In August, Russia’s total exports through European ports and the Druzhba pipeline amounted to 12.05 million tons, of which about 5.5 million tons (1.3 million barrels per day) were shipped to countries that will stop importing Russian oil from December 5.

Dealers said Russia must find new buyers for this crude, which may require cheap prices and special terms, while also facing more expensive logistics to get it to remote destinations.

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A trader in the Russian oil market said, “Russian Urals oil has always been a grade for Europe. Now to access new markets, one has to ship a cargo outside Europe amid growing concerns about transportation costs, insurance and timings.”

The United States and the European Union are also capping Russian oil prices, arguing that it will 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 do not see the measure working.

“It is unlikely that Russia will operate with a price cap, it does not make sense for Moscow both politically and economically. It is easier for it to negotiate private deals than to openly adhere to some price restrictions imposed by the West,” another Russian oil trader said. to Reuters.

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

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

new ways

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

Russia cannot redirect large volumes of the Urals to the East Siberian Pacific (ESPO) pipeline, which is already pumping close to capacity. This makes shipments through Europe and the Suez Canal the only possible routes for Ural crude to Asia.

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

“Russian companies are already offering discounts, shipping costs, insurance cover, payment options and other perks to keep buyers,” a source at an Asian oil trading company said.

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

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

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

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(Reuters correspondents report). Editing by Mark Potter

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