Oil Price Cap On Russian Crude Could Cause Tanker Shortage
With the EU embargo on imports of Russian oil starting in December, Russia will have to find new homes for around 2.4 million barrels per day (bpd) of its crude and refined product exports, which will be banned from entering EU and G7 countries unless the oil is sold at or below a certain price the buyers expect to set. Even if the price cap mechanism fails to work for the West, as many analysts expect, and even if Russia manages to divert all its previously EU-bound oil exports eastwards to Asia, this would create a shortage in the oil tanker market, sending shipping rates surging further. This would mean elevated oil prices, even for discounted Russian oil because of the high freight rates. Moreover, the available oil tankers not owned or tied to owners from the EU or G7 are simply not enough to handle the massive Russian oil exports, analysts say. The changing trade routes with much longer voyages from Russia’s Baltic and Black Sea ports to Asia – instead of just a week to travel to Europe – would also tie up more tankers on months-long round trips. More vessels would be needed for ship-to-ship transfers from smaller Aframax tankers to very large crude carriers (VLCC) to ship the oil from ports very close to Europe all the way to Asia. Shipping Constraints While very bullish for the tanker owners and freight rates, the biggest oil trade shift in recent memory would create additional headaches for buyers amid lower tanker availability and higher prices due to a surge in shipping rates. The re-routing of Russian crude from West to East would put a strain on the shipping sector, Giovanni Serio, Global Head of Research at the world’s largest independent oil trader, Vitol, said this week. The average Asia-bound route of at least 21 days is triple the Europe-bound voyage, which will result in almost a 3% rise in shipping activity measured in ton-miles, Serio said at the APPEC oil conference in Singapore, as carried by Reuters. Traders will face challenges in finding Aframaxes to load oil from Russian ports, Vitol’s executive added. “There is already a lot of incentive to switch the ship size from Aframax into Vs (Very Large Crude Carriers) that are going to be more available,” Serio said, but noted that VLCCs will need to be loaded via ship-to-ship transfers to load crude or products from smaller vessels. Price Cap ‘Minefield’ In another hurdle for oil shipping after the EU embargo and the price cap enter into force in December, traders and insurers aren’t really sure how the price cap mechanism would work and how much oil flows could be affected. “We need buy-in from governments, and governments to guide us because it’s a bit of a minefield,” Vitol’s chief executive Russell Hardy told the APPEC conference, as carried by Bloomberg. Vitol will carefully assess the price cap developments “before we decide exactly what we think is right for Vitol,” Hardy added. Vitol’s Serio noted that capping the price of Russian oil but allowing it to flow would be a “potential relief valve” for the global oil market. Of course, if Putin makes good on his promise to halt all energy supply—including crude, fuels, natural gas, and coal—to the countries that sign up to cap the price of Russian oil, “Russian oil will have to sail on non-Western tankers – and there aren’t enough vessels to handle Russia’s millions of barrels,” according to Energy Intelligence. Finding tankers and insurance coverage not linked to the EU, the G7, or other countries that may join the price cap mechanism for the amount of oil Russia exports could be next to impossible. Reports have already emerged that India, which has been buying large volumes of Russian crude since the Russian invasion of Ukraine to take advantage of cheap oil, is set to slow purchases of the Russian oil this month and look to more African and Middle Eastern supply as shipping rates on longer voyages have jumped. After the EU embargo enters into force, India and China in theory could absorb additional Russian oil, but the banking sector would be wary of secondary sanctions from the U.S., and this could cap Russia’s ability to export oil, Amrita Sen, founder and director of research at Energy Aspects, told Bloomberg television in an interview last week. In addition, Russia tying up a lot of oil on ships to Asia and then finding buyers would further raise freight rates, she added. Oil Transportation Bottlenecks? Europe-based major tanker owner and oil transportation services provider Frontline said in a presentation at the Pareto Conference this month that volumes of oil in transit continue to grow to unseasonably high volumes. The tanker market is now a “ton-mile story” as the Russian invasion of Ukraine is displacing crude and products trade flows, with “highly inefficient trading patterns developing.” Global crude oil exports are approaching pre-Covid levels, while product flows and oil in transit are already there, Frontline said, adding that order books continue to dwindle, and there are no incentives to invest in new tanker capacity, yet. This could be the start of structural bottlenecks in oil transportation to come, the tanker fleet owner said.
APPEC Russian Urals crude discounts shrink sharply, says India refinery exec
Discounts on the sale of Russian Urals crude have shrunk significantly from the $36/barrel seen soon after the Russia-Ukraine conflict, said an official from Indian refiner Bharat Petroleum Corp, indicating that Moscow is regaining pricing leverage in a tight energy market. The discounts on Urals sold on a free-on-board basis have reduced to the “teens”, Amit Bilolikar, deputy general manager for crude trading, said on the sidelines of the 38th Annual Asia Pacific Petroleum Conference (APPEC). India, which rarely used to buy Russian oil, has emerged as Moscow’s second-largest oil customer after China since Moscow’s invasion of Ukraine in late February. Refiners in India, the world’s third-biggest oil importer and consumer, have been snapping up nearly all grades of Russian crude, taking advantage of discounts after some buyers in the West halted purchases. However, Indian refiners this month are set to skip loading of Russia’s ESPO oil as higher freight rates have made the crude costlier, sources told Reuters earlier this month. India has said that Russian oil purchases are driven by economic considerations as the authorities try to rein in inflation. Bilolikar also said BPCL’s purchases of U.S. oil has been rising steadily, replacing West African and Mediterranean crude. The discount between U.S. crude futures to Brent , rising to more than $7 a barrel, has made it economically feasible for India to import American oil. “U.S. crude oil prices are very dynamic and U.S. (oil) industry is very resilient. Quality wise they are a good replacement for our refineries,” he said. The government-controlled refiner was taking mostly lighter grades such as Midland, he added. To cut Russia’s oil revenue, the Group of Seven nations, led by the United States, plan to impose a price cap on Russian exports. Bilolikar said there was no clarity yet on the planned price cap mechanism. “But one thing is very clear. We do all the due diligence and we follow all the international laws. If there are no sanctions on trade of Russian oil, we’ll definitely continue purchasing,” he said, as securing cheaper supplies are a priority for India.
OMCs unlikely to cut fuel prices despite fall in crude rate
Oil marketing companies (OMCs) are not likely to reduce the transport fuel prices in the domestic market even as crude prices fell below $85 a barrel in the international market, lowest since January 14, 2022. An official from one of the OMCs, on condition of anonymity, said oil companies have suffered a major loss in the past few quarters, thus there is no scope to cut the fuel price. “It is not only one company but all companies have suffered losses when crude price was high in the international market. Therefore, I don’t think there is any reason to cut down the price right now,” said the official. According to the oil marketing companies, Indian Oil Corporation Ltd (IOCL), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) collectively lost Rs 184.80 billion on holding petrol and diesel prices. These companies said the losses were due to erosion in the marketing margin on petrol, diesel and domestic LPG. In the April to June quarter 2022, BPCL posted a loss of Rs 62.91 billion, IOCL reported a net loss of Rs 19.95 billion and HPCL’s loss was at Rs 101.97 billion. “Oil industry is volatile; I won’t be able to comment when the oil marketing companies make up their losses. In another word, the prices are not going to change in the next few months, “said the official. A Fitch report on BPCL credit outlook says: “We believe near-term prices will remain a function of the government’s efforts to balance OMCs’ financial health with inflationary and fiscal pressures. However, the marketing segment should turn profitable from FY24, as crude oil prices fall to Fitch’s assumption of $80 per barrel,” the report further says. International crude oil prices have been under pressure due to fear of global recession and rising interest rates. Brent Crude Future, the benchmark for the crude price, on Monday, (6.52 pm IST) was trading at $85.65 a barrel, down from the peak of $125 in May. However during the April to June quarter, oil companies did not revise petrol and diesel to tackle inflation in the country. Usually these companies revise oil prices on a daily basis, in line with international prices. India crude oil basket averaged $92 per barrel in September, down from $116 in June. In a nutshell Crude prices fell below $85 a barrel in global market, lowest since Jan 14, 2022. Oil companies collectively lost Rs. 184.80 billion on holding petrol and diesel prices. India crude oil basket averaged $92 per barrel in September, down from $116 in June.
ONGC gets better price for oil under new rules
India’s Oil and Natural Gas Corp has for the first time sold oil through a three-month local tender, commanding $5-$8 per barrel more than existing rates under new rules that allow producers marketing freedom, industry sources said. ONGC, the country’s top oil explorer, accepted bids at that level through auction of light sweet oil from its western offshore field, including supplies from the country’s flagship Mumbai High fields, they said. In June India abolished a rule that said oil from blocks awarded prior to 1999 must be sold to government-nominated customers, mostly state refiners. That meant producers such as ONGC and Oil India often sold oil from those blocks at below market rates. ONGC had offered 33 lots of 412,500 barrels each – 26 cargoes from Uran and seven cargoes from Mumbai offshore – for sale starting Nov. 1 at minimum 50-cent premium over the average monthly price of Brent, according to a tender document seen by Reuters. Western offshore assets, including the Mumbai High fields, account for about 70% of ONGC’s annual output of nearly 20 million tonnes, or roughly 400,000 bpd. All the cargoes were sold to state refiners except one, which was awarded to Reliance Industries Ltd, sources said. State refiner Hindustan Petroleum bought 15 cargoes; Mangalore Refinery and Petrochemicals (MRPL.NS) bought five; and Bharat Petroleum Corp was the highest bidder for three, the sources said. Indian Oil Corp, the country’s top refiner, got one cargo while its subsidiary Chennai Petroleum Crop was awarded eight, the sources said. Indian refiners bid to pay a premium of $1.80-$1.85 per barrel for cargoes from Uran, where supplies come through a pipeline, $3.8-$6.5 per barrel for offshore cargoes and about $1.55 per barrel for a parcel from Panna Mukta field, they said. Uran cargoes fetch a lower premium as local levies make the crude costlier than offshore supplies. Sources said ONGC hopes to get better participation in subsequent tenders. None of the companies involved responded to Reuters’ requests for comments. India, the world’s third-biggest oil importer and consumer, imports more than 85% of its oil, and bars crude exports.
Gas price review panel seeks more time
Natural gas is a fossil energy source that formed deep beneath the earth’s surface. The government-appointed panel for reviewing the pricing of natural gas has sought more time to submit its report as it does a tightrope walk of striking a balance between the expectations of producers and consumers, sources said. The panel headed by former planning commission member Kirit S Parikh was tasked to suggest a “fair price to the end-consumer” by the end of September. Given the enormity of the task, the committee wanted 30 more days to finish the report but the government wants it to wrap up the work by mid-October, two sources with knowledge of the matter said. A decision on the exact duration of the extension will be taken next week after oil secretary Pankaj Jain returns from his overseas trip, they said. Natural gas is a fossil energy source that formed deep beneath the earth’s surface. It is used to generate electricity, produce fertiliser, convert into CNG to run automobiles and piped to household kitchens for cooking and heating. It is also used in making glass, steel, cement, bricks, ceramics, tile, paper, food products, and many other commodities as heat sources. Its prices remained docile till last year but have shot up in recent months, raising the cost of production of user industries in general and city gas operators that sell CNG to automobiles and piped cooking gas to households, in particular. To keep rates under check so that they do not add fire to already high inflation, the government formed the committee to review the way prices of gas produced in India are fixed. The panel includes representatives of the gas producers association as also state-owned producers ONGC and OIL, a member from private city gas operators, state gas utility GAIL, a representative of Indian Oil Corporation (IOC) and a member from the fertiliser ministry. Sources said the committee has so far held two meetings but is no way near formalising its recommendation. The fault lines were clearly visible in the very first meeting. While the producers insisted on complete market freedom as had been guaranteed in the contracts they signed for finding and producing the fuel, consumers wanted a “fair price”, sources said. Producers argue that artificially controlling prices would dry up investments in exploration, consumers particularly the city gas sector felt that the environment-friendly fuel would lose out to other hydrocarbon fuels if the prices were not reasonable, they said. At the second meeting, there was an agreement that an attempt has to be made to see that investments in exploration are not dissuaded. At the same time, the momentum that the city gas sector has got should not be disturbed. The panel is now collecting data points from both sides to arrive at an informed decision, they said, adding that the committee will have to meet more often if only a 15-day extension is given. The Modi government had in 2014 used prices in gas surplus countries to arrive at a formula for locally produced gas. Rates, according to this, are set every six months — on April 1 and October 1 — each year based on rates prevalent in gas surplus nations such as the US, Canada and Russia in one year with a lag of one quarter. The rates according to this formula were subdued and at times lower than the cost of production till March 2022, but rose sharply thereafter, reflecting the surge in global rates in the aftermath of Russia’s invasion of Ukraine. The price of gas from old fields, which are predominantly of state-owned producers like ONGC and Oil India Ltd, was more than doubled to USD 6.1 per mmBtu from April 1, and is expected to cross USD 9 per mmBtu at the next review due on October 1. Similarly, the rates paid for gas from difficult fields such as deep sea KG-D6 of Reliance Industries went up to USD 9.92 per mmBtu from April 1 against USD 6.13 per mmBtu. They are expected to rise to USD 12 per mmBtu next month. The panel has been asked to recommend a fair price to end-consumers and also suggest a “market-oriented, transparent and reliable pricing regime for India’s long-term vision for ensuring a gas-based economy,” according to an order of the oil ministry. The government wants to more than double the share of natural gas in the primary energy basket to 15 per cent by 2030 from the current 6.7 per cent. The sources said the increase in gas price is likely to result in a rise in CNG and piped cooking gas rates in cities such as Delhi and Mumbai. It will also lead to a rise in the cost of generating electricity but consumers may not feel any major pinch as the share of power produced from gas is very low. Similarly, the cost of producing fertiliser will also go up but as the government subsidises the crop nutrient, an increase in rates is unlikely.