The Russian invasion of Ukraine has changed global oil trade routes forever.
In one of the most significant rerouting of oil flows in recent decades, Europe is now looking to haul in growing volumes of non-Russian crude, while Russia—shunned in the West—is looking East for its next top exporting market.
The Russian war in Ukraine and the sanctions from the United States, the United Kingdom, and the European Union that followed upended the entire global oil supply chain. The closest neighbors geographically—Europe and Russia—are now each looking in the other direction for supply and export routes.
Altered Oil Routes
The changes to oil flows are already evident three months after Russia invaded Ukraine. Europe is now importing record volumes of U.S. crude, North Sea crude, and is attracting more barrels of light sweet crude from West Africa as its governments try to reduce—and ultimately eliminate—its dependence on Russian oil. Moreover, trading houses, insurers, reinsurers, and tanker owners based in the UK and the EU avoid dealing with Russian oil supplies to comply with the current and future sanctions on Russia’s oil exports.
Europe’s challenge to cut off dependence on Russian oil has been evident over the past month as the EU took weeks to agree on some sort of a compromise on a Russian oil embargo. From banning all Russian oil imports, via any means, effective by the end of 2022, the initial proposal of the European Commission was eventually watered down to an agreement on a ban on seaborne imports by the end of the year with an exemption for pipeline crude.
The sixth package of EU sanctions against Russia will immediately impact 75% of Russian oil imports, and by the end of the year, 90% of the Russian oil imported by Europe will be banned, Charles Michel, President of the European Council, said early on Tuesday after the EU reached an agreement to start banning Russian oil imports.
This will further upend global oil flows as Europe will be seeking much more seaborne crude from outside Russia, its largest oil supplier before the war. The ban also means that Russia will have to double down on its efforts to sell more of its crude to Asia, primarily to China and India, in the absence of its biggest market so far, Europe.
Europe Looks West
To replace Russian crude, Europe is increasingly looking at more supply from the UK and Norway’s North Sea crude, more supply from the United States, and barrels from West African producers. In April, the United States shipped the highest volume of crude to Europe since the U.S. lifted a ban on crude exports in 2016, ship-tracking data compiled by Bloomberg showed.
Europe imported around 1.45 million barrels per day (bpd) of American crude in May, which is up 15% compared to March, according to data and analytics company Kpler cited by Reuters.
Europe is also significantly raising imports of crude from or via North Africa and from West Africa, tanker-tracking firm Petro-Logistics told Reuters. Nigeria and Angola are boosting their exports to Europe, which has sent Nigerian crude prices rising to record premiums to Dated Brent. Nigeria’s Forcados and Escravos crudes have been recently offered at a premium of $8 a barrel over Dated Brent, traders told Reuters on Monday. That’s the highest-ever premium for Nigerian crudes, per Refinitiv Eikon data.
Russia Looks East
The increase in sales of African crude in Europe comes at the expense of lower African sales in Asia, where India and China are buying heavily discounted Russian crude barrels.
Asian buyers are Russia’s chance to reroute its oil away from Europe, where Russian crude is no longer wanted. Russian exports to India and China have jumped, replacing part of the West African crude that has typically flown to India.
The world’s third-largest oil importer, India, saw its imports of West African crude nearly halve in April compared to March, Petro-Logistics President Mark Gerber told Reuters.
India’s overall crude oil imports jumped by 15% in April year on year, Petro-Logistics said earlier this month.
“Big increases from Middle East at the expense of African barrels which have increasingly gone to Europe. Russia supplying record volumes to India,” Petro-Logistics noted.
In India, cheap Russian crude oil is attracting price-sensitive buyers to the point that Russia became the fourth largest oil supplier to India in April, moving up from 10th place in March.
India is set to import record volumes of Russian crude in May and June, at 24 million barrels and 28 million barrels, respectively, up from 7.2 million barrels in April, the previous record for imported Russian oil, per Refinitiv Eikon data cited by Reuters.
The significant increase in India’s purchases of Russian crude has already drawn the attention of the United States, which has reportedly sent a U.S. federal government official to discuss U.S. sanctions on Russia and try to convince India to reduce its purchases of Russian oil.
Russia is also exporting an estimated 400,000 bpd—mostly to Asia—via ship-to-ship transfers from smaller vessels to supertankers in the Mediterranean, according to Petro-Logistics.
Even if Asia cannot fully replace all the oil exports Russia will be losing in Europe, Russian oil shipments to India and China are set to further increase in the coming months, barring a diplomatic intervention from the West to persuade India not to boost Russian imports too much. At any rate, crude trade flows have changed forever—Europe looks to Africa and the U.S., while Russia pins its hopes on India and China.
By Tsvetana Paraskova for Oilprice.com