AlwaysFree: Russian Oil Binge Becomes A Problem For Refiners Who Miss Out

• Processors mull run cuts as profit from processing oil shrinks
• Refining margins of Russian crude buyers still remain healthy

According to Bloomberg article published on April 27, 2023, sanctions on Russia’s oil sales are increasingly putting those refiners that can no longer buy the OPEC+ producer’s crude at a disadvantage.

In parts of Asia where Russian crude is no longer on the menu because of sanctions, refineries are now making almost no profit from processing Middle Eastern barrels, according to fair-value data compiled by Bloomberg. 

The slump, caused by lackluster demand and expansion in processing capacity, has seen some plants across the world’s top oil consuming region mulling plans to scale back fuelmaking. There’s also been speculation curtailments could soon take place in Europe.

But the picture is completely different for refineries in India and China who’re still purchasing discounted oil from Russia and other nations like Iran and Venezuela. Refinery officials in Asia and Europe who aren’t able to purchase from Russia because of the sanctions said they were hamstrung by the measures. They asked not to be identified discussing their own companies’ operations.

The bifurcation underscores that the Group of Seven’s price cap and European Union’s sanctions targeting the Kremlin’s access to petrodollars are not without pain for the industrialized nations’ own economies. Those plants that can buy Russian crude are also legally selling large amounts of it back to G-7 nations once it’s refined into fuels like diesel and gasoline.

Oil Shipments From India and China Grow Sharply

“We’re going to keep seeing winners and losers as long as Russian oil flows at a discount,” said Yousef Alshammari, chief executive officer at London-based industry consultant CMarkits. “It’s definitely an economic advantage if that discounted oil is refined and sold as products to international markets.”

The price of oil delivered to India from western Russia is about $9 a barrel cheaper than Dubai crude that serves as a benchmark in the Middle East, according to data compiled by Bloomberg. Barrels from the emirate would also still be more expensive for refineries because the Dubai price doesn’t include freight transportation.

In China, theoretical profit margins for the nation’s independent processors, also known as teapots, were little changed week-on-week at 825 yuan a ton, or about $16 per barrel, in the latest available data for April 14, according to OilChem data. That’s more than double the level in early January.

“Teapots are profiting by using heavily discounted oil from places including Russia and Iran,” said Jianan Sun, a London-based analyst at Energy Aspects Ltd. 

Margin Boost

China ramped up processing to a record in March, with Energy Aspects forecasting elevated crude imports this month and next.

For India, the nation’s top two state oil refiners recorded more than $20 a barrel in gross refining margins in April-December of last year, a steep increase of at least 150% from the previous fiscal year, government data show.

That’s being boosted by an influx of discounted barrels.

China received the highest-ever volume of crude from Russia last month, customs data show. India also continued to import its largest amount of Russia’s flagship Urals grade in the same month, according to tanker tracking data compiled by Bloomberg.

Western economies within the Group of Seven nations, as well as most other parts of Asia, didn’t import any Russian shipments this year. The European Union’s sanctions on OPEC+ producer’s crude oil were introduced in early December.

While the bloc’s refiners have had to cut Russian crude purchases, their imports of refined fuels from India and China have shot up, further eroding margins. 

An average of around 363,000 barrels of clean oil products were delivered daily into the region from the two Asian economies in December to April, almost tripled from flows observed in 2021, according to data from shipping analytics firm Kpler.

“What happens next comes down what happens to demand for refined products and their prices,” said Giovanni Staunovo, analyst at UBS Group AG.

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