- Russian producers seek ways to offer financial support
- Payment concerns grow, China takes a step back
- North Asian refiners under pressure to cut runs
A news article published in the Platts states that North Asian buyers avoid Far East Russian crudes in March on sanctions, payment hassles.
Crude oil from Far East Russia
Crude oil from Far East Russia, usually a staple for North Asian refiners, is facing a dearth of buyers this month as mounting sanctions against Russia make the trade fraught with risk, sources told S&P Global Commodity Insights March 17.
Following the failure of India’s ONGC to attract any bids in its tender to sell a Far East Russian crude cargo last week, traders said other major sellers including Surgutneftegas and Gazpromneft may skip tenders and instead hope to strike deals through private negotiations. Surgutneftegas, Gazpromneft and ONGC declined to comment.
Sellers were said to be offering alternative finance, credit and logistics options to buyers in a bid to offload cargoes that were already valued at steep discounts to similar oil. But so far, buyers remain on the sidelines, wary of the risk to their reputation and of the challenges posed by sanctions.
The stalemate in trade for waterborne supply of Far East Russian crude, estimated at 700,000 b/d, underpins fears of an acute supply shortage for Asian refiners that are already facing dwindling margins. Traders say this may push many refiners in China, Japan and South Korea to cut run rates.
“Refineries across Northeast Asia, including China, have been cutting run rates amid lower supply of Russian crudes and limited replacement crude alternatives,” a trader with a Japanese trading house said.
Sanctions were making it difficult for companies to perform on trades well before Russia’s invasion of Ukraine. At least a couple of Far East Russian crude cargoes were heard to have been shipped to China on a delivered duty paid or DDP basis, where the seller holds the cargo in onshore tanks and ships oil to the customer in small batches in exchange for cash payments.
The change in the trade terms was forced by sanctions on Russia prompting many banks to abstain from financing trade in Russian commodities.
China holds back
Chinese independent refineries, end-users of ESPO cargoes, usually have to open a letter of credit with a banks in order to make the payment.
According to industry sources, when opening an L/C, the requirement is for a deposit equating to 20% of the full payment for the cargo. With a bank guarantee, buyers are allowed to settle the payment 30-90 days after they receive the cargo.
But no banks are currently willing to provide L/Cs for Russian-related commodities to independent refineries, which instead have turned to telegraphic transfers or T/Ts to fulfill contracts, which is as good as paying in cash, according to sources.
This upfront payment of around 110%-115% for a cargo could hurt cash flows, with the additional 10%-15% counted as a deposit to protect sellers against oil price surges, refinery sources said.
“Buying ESPO via T/T is still an option, but the financial cost is much higher via T/T than L/C,” a trade source said.
Some sellers of Russian cargoes are now said to be offering on a direct payment rather than L/C basis, but there are few takers.
“Currently only very few trading companies are willing to take the open credit to sell crudes to independent refineries,” the first source said, adding the last option would probably still be T/T, the cost of which was higher.
However, the second Singapore-based crude oil trader said buyers in China could have the option to purchase crude in Yuan or pay via the DDU incoterm to route Russian cargoes to China.
Nevertheless, very few buyers were willing to commit and undertake risks, the trader added.
Support from China was being seen as crucial for stressed Russian sellers, but has failed to take off due to the lack of clarity among buyers and payment hassles, sources said.
“Honestly I think SOEs [China’s state-owned enterprises] might not be in a hurry to touch Russian crude without a clear vision against this Ukraine-Russian situation,” a trader with a North Asian refinery said.
Trading houses more active
Market participants said trading houses could be more active in buying Russian crude and fronting for buyers such as Chinese independent refineries.
“Very limited direct Chinese buyers in Surgut tender, most are international trading houses,” another trader with a North Asian refinery said.
For May-loading ESPO Blend crude, Trafigura was heard to have bought a cargo via private negotiations from Gazpromneft, but the information could not be verified. Trafigura did not comment.
Despite limited demand for Russian grades, trading houses have been active in moving the country’s crude to Asia.
Indian Oil Corp. and fellow refiner HPCL were also heard to have bought Urals crude from Vitol on a delivered basis.
Urals is a medium sour Russian grade that loads from the Mediterranean and is often preferred in India and other Asian countries as an alternative to Oman Blend crude.
Last week, India’s state-owned Oil and Natural Gas Corporation failed to attract buyers in its tender to sell a May-loading Russian Sokol crude cargo, S&P Global reported earlier
Trade sources said there was a high possibility that ONGC could channel the Sokol cargo back to its refining system, a unique situation given India’s limited demand for Far East Russian crude. ONGC declined to comment.
Traders could continue to look at storing cheaper, discounted oil though a volatile and backwardated market, where current prices are higher than future prices, but this was loaded with risks, sources said.
“If it [the purchased oil] is very cheap, yes [can store], but it is a really risky position [when] you don’t have control of how many days it has to stay in storage.” a trader with a Western oil producer said.
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