Crude oil trade flows have been redrawn since the Russia-Ukraine conflict began in late February, with Russian crude displacing competitors from Asia, and leaving holes to be filled in Europe.
As European refiners have rejected Russian crude in the spot market and as term contracts gradually expire ahead of an EU embargo on seaborne Russian crude coming into force at the end of this year, more Russian crude is being redirected to Asia-Pacific, at steeply discounted prices. This is displacing crude from the Americas, west Africa and the Mideast Gulf. The displaced crude in turn is finding a home in Europe’s tightened crude market, as the charts below based on Vortexa monthly loadings data show.
This is unlikely to be a temporary situation, with western allies seeking to tighten the screws on Russia and Asia-Pacific refiners apparently happy to continue to buy Russian crude as long as the price is relatively low.
Russian crude exports through the Baltic and Black Seas to Asia-Pacific, particularly India and increasingly China, hit record levels of well over 1mn b/d in May, overtaking exports to Europe for the first time. Exports from every other potential swing region have dropped to Asia-Pacific and increased to Europe so far this year.
Even exports from the Mideast Gulf — traditionally targeted at Asia-Pacific — have begun to swing, with Abu Dhabi leading the charge as we noted recently. While the trend at a regional level appears less dramatic than those seen above, the larger volumes involved mean that any sustained swing of Mideast Gulf exports will have a major impact on the market, not to mention the delicate politics of the Opec+ group, with Mideast Gulf exporters ceding market share to Russia in Asia-Pacific in return for higher prices in Europe.
The changing flows have already disrupted pricing. The traditional “Asian premium” that has persisted for most of this century, as quicker economic growth in east Asia made it the oil market’s centre of gravity, recently collapsed as that region has lost some of its pull.
The twin impacts of sluggish recovery from the pandemic, with restrictions persisting in parts of China, and a slew of discounted Russian crude flowing to the region, have meant that, unusually, physical crude demand in Europe has set the pace.
Exporters to both regions that use formula pricing for term sales, such as Saudi Aramco, have charged higher prices for European buyers in recent months, pushing the “Asian premium” into unaccustomed negative territory, particularly in June.
The pendulum appears to have swung back from those steep discounts, with the September Aramco official formula prices trimmed for Europe for Arab Light and Arab Extra Light versus Brent, but raised for Asia versus Dubai/Oman — although prices for Arab Medium and Heavy crude have continued to climb for European buyers.
As the new trade routes become more entrenched, European buyers are likely to be increasingly at the mercy of higher relative prices for medium and heavy sour crude, with their accustomed staple, Russian Urals, flowing to Asia-Pacific instead, and exporters in Latin America and the Mideast Gulf seeking to ramp up sales to the region.
Argus has launched a new crude price index for Europe, Argus Brent Sour, to give these sellers and their European refiner customers a benchmark for medium sour crude prices in the region, now that Urals prices can no longer fulfil that function.
A key supplier to Europe is now the US, of course, with the amount of WTI arriving in Europe often outweighing the totality of the Brent basket’s production. Total US crude exports, according to the most recent weekly EIA data — which are often subject to revision — are unusually high at 4.5mn b/d, and in the past few months have been weighted more to Europe than to Asia.
US crude exports are generally light and sweet, however, so the transatlantic flow is only serving to narrow the sweet-sour spread in Europe, as similar quality Libyan output returns to a pre-blockade levels of 1.2mn b/d and Nigerian and Angolan crude shut out of the Indian market by Russian Urals floods into Europe instead.
While the situation is in flux, the future shape of the market is coming into focus, and it is radically different to what went before.
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Source: Argus Media
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