Russia Scrambles to Maintain Oil Sales, Lifeblood of Economy

Refiners balk at buying Russia’s oil and banks refuse to finance shipments of Russian commodities, fearing the impact of financial sanctions.

In their broadside of sanctions on Russia, the US and its allies are going out of their way to spare energy shipments and keep economies humming and voters warm.

The oil market went on strike anyway. Acting as if energy were in the crosshairs of Western sanctions officials, refiners balked at buying Russian oil and banks are refusing to finance shipments of Russian commodities, according to traders, oil executives and bankers.

The self-imposed embargo threatens to drive up energy prices globally by removing a gusher of oil from a market that was tight even before President Vladimir Putin attacked Ukraine. Russia, waging war and in need of revenue with its financial system in turmoil, is taking extreme steps to convince companies to buy its most precious commodity.

Before refiners and banks are certain they won’t fall afoul of complex restrictions in different jurisdictions, they won’t do business with Russian oil, traders and others involved in the market say. Market players also fear that measures that target oil exports directly could land as fighting in Ukraine intensifies.

“This is going to make it very complex to trade with Russia,” Sarah Hunt, a partner at law firm HFW who works with commodities traders, said of the sanctions laid out as of Monday. “These sanctions against Russia will have an incredible effect on global trade and on trade finance.” Brent-crude futures, the benchmark in international energy markets, rose more than 7 per cent Tuesday to almost $105 a barrel.

In a sign that demand for Russian oil has evaporated, prices for the country’s flagship Urals crude moved in the opposite direction.

Traders are offering Urals at massive discounts -- as much as $18 a barrel below the price of Brent -- and even then not finding buyers. A drop in the price of Espo, a grade of Russian crude popular in Asia, suggests refiners in Japan and South Korea are hitting pause on purchases alongside those in Europe and the U.S.

“The market is starting to fail,” said a person at a major commodities trading house.

Companies including Vitol and Trafigura Group Pte. Ltd. -- among the world’s biggest independent oil traders -- hold Russian oil bought under long-term deals. They were unable to sell Tuesday, people familiar with their operations say.

In Europe, Swedish refiner Preem AB and Finland’s Neste Oyj say they have stopped Russian oil purchases and mostly replaced them with Northern European oil purchases. 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 was on the eve of Thursday’s invasion. But those flows, based on sales made before the war, will slow drastically in the coming weeks once cargoes have been delivered, traders and analysts say.

Russia was seen as having the upper hand when it came to energy in its confrontation with the West. In peacetime, Russian crude and other varieties of oil get funnelled into refineries in Europe, the U.S. and Asia. There, it gets converted into fuels that power fleets of cars and other forms of economic activity.

Europe especially relies on Russia for much of its energy needs, both for natural gas to heat homes and fuel electricity plants, but also the oil that travels through pipelines directly into refineries in Germany, Poland, Slovakia and elsewhere. Some of that oil transits through Ukraine.

The importance of Russia’s energy industry -- exporter of about 7.5 per cent of the world’s oil -- to the global economy led Western governments to carve oil and gas out of their sanctions. In cutting some but not all banks from the financial system’s messaging infrastructure, Swift, the U.S. and others left avenues for traders to pay for oil and gas.

As prices for Russian crude tanked last week, companies in India vacuumed up around seven million barrels of Urals oil, according to people familiar with the matter. Even there, however, companies are taking steps to limit sanctions risk.

On Monday, Indian Oil Corp. sent a letter to crude traders stating it would buy Russian oil only 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 had to take responsibility for transporting the oil. This was because some shipping companies are hesitant to load Russian crude, the person said.

Indian Oil didn’t immediately respond to a request for comment. Russia is responding fast to shore up demand for its oil, a particularly vital source of dollars now the country’s foreign-currency reserves have been frozen by the U.S. and allies.

Companies including state-aligned giant Rosneft Oil Co. have pivoted from offering oil on a so-called FOB basis, in which buyers fix their own vessel and finance and insure the shipment, traders and oil executives say. Instead, they are offering oil on what is known in industry jargon as a CFR basis.

Under this model, Rosneft would use vessels from government-owned Sovcomflot’s fleet and deliver oil to the buyer’s door in return for cash, which means the buyer doesn’t have to worry about transportation, trade finance or insurance. Buyers are rejecting the proposal, an oil-industry executive and a Middle East oil trader said.

Rosneft didn’t respond to a request for comment.

China has scooped up more Urals, which normally are mostly sold on 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 scheduled to arrive in late March, said Kevin Wright, lead oil analyst at market-intelligence firm Kpler. A Sinopec spokesperson didn’t immediately respond to requests for comment.

Still, traders said China hasn’t vacuumed up cheap barrels in the way it did when global oil prices crashed at the start of the pandemic. Beijing is treading a careful diplomatic line over the war, abstaining on a United Nations vote on condemning the invasion last week.

One challenge facing Rosneft and other producers: Governments including the U.K. and Canada are banning Russian oil tankers. On Monday, one such vessel was forced to cancel an arrival to Scotland after the U.K. instituted its ban.

Many Western shipping companies have grown wary of sailing in the Black Sea to the south of Ukraine and are contending with a jump in insurance rates for operating near a war zone.

Banks that grease the wheels of international commerce are refusing to finance Russian commodity deals. Lenders including ING Groep NV, Société Générale SA and Credit Suisse Group AG aren’t issuing letters of credit -- a form of trade finance -- for oil and other natural resources from Russia, according to people familiar with the matter.

Spokespeople for Société Générale and Credit Suisse declined to comment. An ING spokesman said the bank wouldn’t grant loans to any Russian entities for now, including those used to finance the commodities trade.

“The major problem is now on payment terms,” said Igho Sanomi, founder of energy-trading company Taleveras. “That has become very difficult.”