The Biggest Reshuffle Of Oil Flows Since The 1970s
The biggest reshuffle of oil trade flows since the Arab oil embargo of the 1970s is underway—and things may never return to normal. The Russian invasion of Ukraine and the sanctions on Russian oil exports are changing global oil trade routes. Over the past nearly five decades, oil flowed more or less freely from any supplier to any customer in the world, except for sanctions on Iran and Venezuela in recent years. This free energy trade is now over, after the Russian aggression and the Western sanctions that followed, plus Europe’s irreversible decision to cut off its dependence on Russian energy at any cost. A New Cold War In The Oil Market A new Iron Curtain is now upending oil flows as Europe turns to the U.S., the Middle East, and Africa (and basically everyone that’s not Russia) for oil supply. The EU adopted last week a sanctions package to stop importing Russian seaborne crude oil within six months and Russian oil products within eight months. In a much farther-reaching measure in the sanctions package, the EU also bans EU operators from insuring and financing the shipment of Russian oil to third countries after a six-month wind-down period. The UK is also set to join the insurance ban after the UK and the European Union have reportedly agreed to jointly shut off Russia’s access to oil cargo insurance. The UK is home to an insurers’ club that covers 95% of the global oil shipment insurance market. This move is expected to make Russian oil shipments to countries willing to take its oil, mostly in Asia, more difficult to arrange in terms of liability coverage, and could prompt buyers in India and China to ask for even steeper discounts of the Russian crude to Dated Brent. The flagship Urals grade from Russia is selling at a more than $30 discount to Brent these days. Trade Routes Shift By the end of this year, Europe expects to have effectively banned 90% of all its imports of Russian oil before the war. The embargo and the self-sanctioning are already upending global oil tanker traffic. Instead of traveling two or three weeks from Russia’s Baltic ports to Hamburg or Rotterdam, tankers carrying Russian oil now travel two or three months to reach India and China. For oil going to Europe, crude from the Middle East will now travel longer distances to European ports compared to the shorter routes to India and China. hese changes in oil flows will result in higher insurance, shipping, and financing costs for cargoes, Zoltan Pozsar, Global Head of Short-Term Interest Rate Strategy at Credit Suisse and a former U.S. Treasury Department official, told The Wall Street Journal. More expensive energy trade—due to the end of the free trade that was based solely on market signals of supply, demand, and prices—could put commodities at the center of the next global economic crisis, Pozsar told the Journal. Winners and Losers Sure, Russia is increasingly using ship-to-ship transfers to load crude from smaller tankers onto supertankers. It is also expected to backchannel part of its crude shipments the way Iran has been doing since the U.S. sanctions on its oil exports were re-imposed in 2018. Still, Asia will not be able to absorb all the Russian oil that was previously going to Europe, which was Russia’s number-one oil customer before the war. India, which has traditionally bought oil mostly from the Middle East, is boosting Russian oil purchases, taking advantage of the cheap Russian crude. Middle Eastern producers, for their part, are expected to supply more oil to Europe, as will African producers and the United States. India and China are Russia’s chance to continue selling its oil. Although Russia publicly expresses confidence that it will have “new markets” for its energy, analysts doubt all the oil that would have gone to Europe could end up with buyers in Asia, also because of liability coverage issues and the changing oil trade routes which extend the period of crude traveling from seller to refiner. For Europe, the choice of oil supply is now political, and it will be willing to pay a premium to procure non-Russian oil. This will tighten supply options and continue to support elevated oil prices for months to come. Commenting on the EU’s embargo on Russian seaborne oil imports, Fitch Ratings said last week: “This ban will have a significant impact on global oil trade flows, with about 30% of EU’s imports needing replacement from other regions, including the Middle East (Saudi Arabia and the UAE have sustained production spare capacity of about 2MMbpd and 1MMbpd, respectively), Africa and the US.” “However, we believe that redirecting of all Russian oil and products volumes may not be possible due to infrastructural limitations, buyers’ self-restrictions and logistical complications, such as potential restrictions on providing insurance for cargos carrying Russian oil. As a result, we estimate that about 2MMbpd-3MMbpd of Russia’s oil exports, or about a quarter of the country’s oil production, may disappear from the global market by end-2022,” Fitch noted. In this new world order for oil trade flows, there are two key issues that the market and policymakers in the United States and Europe will be looking at in the near term. These are whether the world has enough spare capacity to replace EU’s Russian imports, and how willing the holders of spare capacity—Saudi Arabia and the UAE—will be to tap into that capacity. Per OPEC+’s deal, Saudi Arabia’s target production for July is 10.833 million bpd, but the Kingdom has very rarely tested a sustained production of 11 million bpd despite claiming a capacity of 12 million bpd.
Essar Oil crosses 0.8 mmscmd mark in coal bed methane production
Essar Oil and Gas Exploration and Production Ltd (EOGEPL) on Tuesday said it has crossed the 0.8 million standard cubic meters per day (mmscmd) mark of coal bed methane production and is inching towards the benchmark of 1.0 mmscmd post commissioning of the Urja Ganga Pipeline. The company said it is committed to contributing to India’s vision of becoming a “Gas Based Economy” in the next decade, by ramping up its CBM gas production. “The importance of domestic gas in the energy basket for a developing country like India is extremely crucial considering the uptrend in gas demand, price and rising import bills,” EOGEPL CEO and Director Pankaj Kalra said. “The unavoidable delay in the GAIL Urja Ganga trunk line caused numerous challenges for us. However, steady efforts and technological applications to ramp up gas production to double the production and cross 0.8 mmscmd has brought us back on track,” he said. EOGEPL said its next milestone remains 1.0 mmscmd of CBM production. The future ramp-up will be an integration of re-fracturing and revival of wells, alongside fresh technological applications, many of which will boast of its first time application in CBM in India, the company said. EOGEPL is engaged in Raniganj East CBM Block in West Bengal. As of now, EOGEPL operates around 350 wells in the block and since May 2021.
Will Doubling Down On Cheaper Russian Oil Help India Tackle Inflation at Home?
Even as Russia is offering deep discounts on its crude oil supplies, India is looking at buying more oil from the country which may help ease inflation in India. The development gives Indian refiners better bargaining power with price-setter Saudi Arabia and also reduces India’s dependence on West Asian oil. It will also help control inflation in India as cheaper crude will reduce the petrol and diesel prices in India, thus bringing down the overall inflation. How Much Crude Oil India Imports? India’s import bill nearly doubled to $119 billion in the financial year 2021-22. During the previous financial year, India had spent $62.2 billion on oil imports, according to data from the oil ministry’s Petroleum Planning & Analysis Cell (PPAC). The country imported 212.2 million tonnes of crude oil in 2021-22, a significant jump as compared with 196.5 million tonnes a year ago. After Russian President Vladimir Putin approved a special military operation in Ukraine’s Donbass region on February 24, the Brent crude oil prices hit USD 100 per barrel for the first time since 2014. In the following days, the US’ West Texas Intermediate crude futures even skyrocketed to $130.50 a barrel, its highest since July 2008, before retreating. Brent also hit a high of $139.13, also its highest since July 2008. From Russia, The country bought just 12 million barrels of the oil in the whole year 2021, which was only 2 per cent of its total imports. India’s own domestic production is more than that. However, it increased after discounts, Russian oil arrivals into India for May were at 740,000 barrels a day, up from 284,000 barrels in April and 34,000 barrels a year earlier, according to data from Kpler. How Will It Help India? With over 80 per cent of India’s oil requirement being met through imports, rates in the international market affect the country at a significant level in terms of the import bill. Cheaper oil helps the country in controlling overall inflation. Brent crude oil prices hit $120 a barrel on Monday after Saudi Arabia raised crude prices for July. Russia offered as much as $35 per barrel discounts on the crude oil prices in April. The Reserve Bank of India has said if the crude price rises 10 per cent above the baseline of USD 100 per barrel, domestic inflation could increase even further. Currently, the retail inflation is already high at 7.79 per cent in April, which is the highest in eight years. Oil at discounted prices will bring down petrol and diesel prices further which are also running high. India consumed 202.7 million tonnes of petroleum products in the 2022 financial year, up from 194.3 million tonnes in the previous year. On buying oil from Russia amid boycott by the International community, India’s External Affairs Minister S Jaishankar said, “Buying Russian gas is not funding the war, why it’s only Indian money and fund coming from India and not gas coming to Europe which funds war, let’s be even-handed out here.”