RUSSIAN Oil Disaster Sales to India Fall as Price Caps Cause Documentation Problems FEBRUARY 2023

[00:00:03]Hi, welcome back to Joe Blogs. This video is the next in a series looking at the financial implications of Russia's invasion of Ukraine on the global economy. And in today's episode, I want to talk about Russian oil. If you've been following the channel, you'll know that I've posted a number of videos recently. Firstly, talking about the production cut that Russia announced on the 10th of February of 500,000 barrels per day. And then secondly, a cut of 650,000 barrels per day in the level of exports through its western ports. So, these are significant numbers. And the big challenge that Russia is currently facing is finding sufficient markets to be able to replace all of the sales that it's lost to the European Union and the West. So, in today's video, we'll have a look at the volume of oil that Russia has been exporting via its pipelines and via ships over the course of the last 12 months. And we'll have a look specifically at the change in the breakdown of the buyers. We'll go on to have a look at which countries are the largest importers of oil because they're obviously the markets that Russia is trying to target. We'll then go on to look at what's been happening with regards to India's purchases from Russia. And I can tell you that in January, there was a record level of oil imported. However, in February, that situation has changed due directly to the sanctions. So, I'll go through some of the details on that. We'll then look at what's going on with regards to China, what the outlook for China's purchases of oil is for 2023, and a deal that China has recently signed relating to a new mega refinery that it's constructing. And then finally today, I'll wrap up with my summaries to what I think is likely to happen with regards to Russian oil exports over the course of the next 3 to 6 months, and what the implications of that will be for the Russian economy.

[00:01:39]This chart shows the monthly exports of Russian oil dating back to January 2021.

[00:01:44]And the different colors on this chart relate to the different regions. The dark blue section at the bottom relates to Northwest Europe. The indigo section relates to European countries in the Baltics. The section above that relates to Mediterranean European countries.

[00:01:57]Above that is the Nordic European countries. We've then got the European countries on the Black Sea. The USA, UK, Japan, and Canada are shown in orange, and green is undetermined. And the first thing that I wanted to highlight from this chart is the actual volume of Russian oil exports. Now, the scale on the left-hand side here is actually shown in millions of tons per month.

[00:02:17]Now, normally when we talk about oil, we're talking in millions of barrels per day. Now, there are roughly 7.4 barrels of oil in a ton. So, if we firstly look at the figure from January 2021, in that month total exports were around 11 million tons. And if we assume an average of 30 days in a month, that equates to around 2.7 million barrels per day. So, that's the level that Russia was exporting back in January '21, a long time before the Ukraine crisis started. And you can see that over the first 6 months of 2021, the level of export increased to around 14 million tons, and it stayed broadly at that level throughout the rest of the year. If we now look at the volume of exports in 2022, which is obviously the year that was affected by the invasion of Ukraine, you can see that the level of exports in January was actually around 15.5 million tons. So, at the highest level at any time during the previous 12 months. There was a drop in the total volume in February following the start of the invasion. However, between March and October we saw a significant increase in the volume of exports. And in October total exports were just short of 18 million tons, which equated to around 4.4 million barrels per day. However, the level has fallen back over the course of the last 3 months, and is now running at around 3.5 million barrels per day. And if we now look at which countries have actually been buying Russian oil, you can see that there's been a significant change over the course of the last 12 months. During the course of 2021, the European Union, which is represented by the different shades of blue on this chart, represented between 55 and 60% of all purchases of Russian exported oil.

[00:03:51]In addition to that, the USA, UK, Japan, and Canada, which are shown by the orange section on this chart, represented around 10% and non-EU and non-G7 countries, which are the countries that are not sanctioning Russia, represented around 25% of all exports. However, if you look at what's happened over the course of the last 12 months, you can see that the orange section disappeared completely because those four countries brought out an immediate ban on the purchase of Russian exported oil, and the blue section is diminished to around 15 percent. And the balance of all of the purchases has been made up by the non-sanctioning countries, which now make up around 85% of all Russian oil that's exported over the sea. Now, before we go on any further today, I want to talk to you about today's sponsor, Masterworks. So, Russia is now trying to find new markets to sell its oil into, but the oil markets aren't the only markets that have been affected by the Ukraine war.

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[00:06:01]Now, the other form of transportation that Russia uses for the export of its oil is pipelines. And if you follow the channel, I'm sure you'll be fully aware that Russia have constructed a network of pipelines throughout Europe over the course of the last 50 years. And up until the start of the invasion, this was the cheapest and most efficient form of delivery for European countries to buy Russian oil. And this chart shows the volume of oil being exported via the Druzhba pipeline, which is the major pipeline that runs through Europe. And this chart also dates back to January 2021. And you can see in that month, the volume of oil was around 3.5 million tons, which equates to around 850,000 barrels per day. And I think what's interesting about this chart is that up until October 2022, there was no significant fall in the volume of oil that Russia was selling via the European pipelines. And the main reason for that is that there was no ban introduced by the European Union on the purchase of Russian oil. Some countries decided unilaterally that they didn't want to buy it, but every country in the European Union was entitled to buy Russian oil up until the 5th of December when an outright ban was brought in on the purchase of all seaborn oil. And some pipeline oil was also banned.

[00:07:08]However, exemptions have been put in place for a number of countries including the Czech Republic and Hungary. And if we now turn our attention to the breakdown by country that's shown on this chart, the blue section at the bottom represents sales to Germany, the red section Poland, Slovakia is the orange section, Czech Republic is the green section, the red section at the top is Hungary, and the blue section is Austria. Now, as I just mentioned, exemptions are in place for the Czech Republic and Hungary, so they will still be able to buy this pipeline oil. But the rest of the countries will be ceasing these purchases. And the reason I wanted to show you this is really just to highlight the fact that Russia needs to find new markets to replace all of these lost sales that it's been benefiting from over the course of the last 30 years. So, in terms of these lost pipeline sales, Russia is going to need to find markets for around 750,000 barrels of oil per day. And that's on top of the 1.75 million barrels per day that they've lost in terms of sales over the sea to European countries. So, in total, Russia now needs to find new markets for 2.5 million barrels of oil every single day.

[00:08:12]This table shows the world's largest importers of oil, and the figures here are shown in barrels per day. And the reason I wanted to show this is to provide some analysis, to have a look at which countries are available to Russia to transfer the lost European sales of 2.5 million barrels per day. The world's biggest importer of oil is the USA, importing around 8 million barrels per day, followed by China at around 6.7 million barrels per day, India at 4 million barrels, Japan at 3.2, South Korea 3, Germany 1.8, Italy and Spain 1.3, France and the Netherlands 1.1, the UK 900,000, Thailand 875,000, Taiwan 846,000, Canada 800,000, Singapore 783,000, Belgium 687,000, Turkey 521,000, and the last three countries making up the top 20 are Indonesia, Poland, and Greece. Now, if we run through this list and talk about the countries in the top 20 that are party to the sanctions against Russia, so therefore are not available markets for Russia to try to export to. We've got the single largest market, which is the USA, followed by the fourth largest market, Japan, the fifth largest market, South Korea, sixth largest, Germany, seven, eight, nine, 10, and 11, which are Italy, Spain, France, Netherlands, and the United Kingdom. Number 14, which is Canada, 16, which is Belgium, and 19, which is Poland. So, that only leaves two countries out of the top 12 importers of oil which are China and India and eight out of the top 20. And really what I wanted to highlight from this chart is the huge dependence that Russia now has on increasing its exports to India and China because if it has to go to all of the rest of the world, the logistics involved in replacing those 2.5 million barrels of oil per day are going to be really quite cumbersome because Russia will need to find lots and lots of small countries to replace the large markets that it no longer supplies.

[00:10:10]Now as you're probably aware, two price caps have been introduced over the course of the last few months against Russian oil. On the 5th of December, a price cap of $60 was imposed against the export of all Russian crude oil which is the vast majority of all oil sales. And in addition to that, on the 5th of February, price caps were introduced against all Russian refined products. So this relates to finished fuel products such as gasoline and diesel. And the impact of these price caps is now being felt by Russia. This chart shows the breakdown of Russian oil exports to selected countries dating back to January 2022. The blue section at the bottom represents exports to China. The brown section are exports to India. The dark blue section are exports to Turkey and the remaining volume of exports have not been classified. And there are a couple of really interesting things to take away from this chart. Firstly, with regards to the exports to China, the level hasn't really increased significantly over the course of the last year. In January 2022, Russia was exporting around 750,000 barrels of oil per day and the current level is around 1 million barrels per day which represents an increase of around 250,000 barrels per day which is only around 10% of the 2.5 million barrels per day of sales that have been lost to Europe. Now the situation is obviously very different with regards to sales to India. In January 2022, Russia was selling virtually no oil to India, had no trading relationship. However, as you can see from the brown section, sales to India have increased significantly over the course of the last 12 months. And in January 2023, India actually overtook China in terms of the level of oil it was buying from seaborne deliveries and was purchasing around 1.25 million barrels per day from Russia, which represents around 50% of the 2.5 million barrels per day lost sales to Europe. So, if this graph ended in January, the situation from Russia's perspective may not look too bad because they managed to increase their sales to China by around 250,000 barrels per day and their sales to India by around 1.25 million. So, that represents 1.5 million out of the 2.5 million of sales that they've lost. However, as you can see, the level of sales to both India and China have fallen in February as a result of the sanctions.

[00:12:20]So, as we've just seen, India's Russian oil imports climbed to a record 1.4 million barrels per day in January, which was up 9.2% from December. And Russia is now the largest supplier of oil to India, accounting for around 27% of the 5 million barrels per day imported in the month. India's oil imports typically rise in December and January as state-run refiners avoid maintenance shutdowns in the first quarter to meet their annual production targets fixed by the government.

[00:12:48]Refiners in India, which historically rarely bought Russian oil because of costly logistics, have emerged as Russia's key oil clients, snapping up discounted crude shunned by Western nations since the invasion of Ukraine started in February 2022. However, it's now been reported that since the oil price caps have been introduced, Indian buyers are struggling under the weight of increasingly onerous demands from financiers wary of breaching Western sanctions, a headache that is slowing transactions and threatening to reduce the level of oil flowing from Russia to India. Refinery and banking executives report that they need to prove Russian imports comply with the $60 per barrel cap imposed by the group of seven nations and now require additional steps and verification of official invoices, contract documents, plus shipping and insurance information, details that were not previously provided. As a result, Indian refiners are scrambling and these added checks could slow down the pace of approvals and potentially reduce India's Russian imports going forward. And the timing of these additional requirements is not good from Russia's perspective because this is happening at the same time as Indian buyers need to take supplies from long-term sellers such as Saudi Arabia, who've been neglected in favor of opportunistic Russian purchases during the course of 2022 in order to meet their contractual obligations for the financial year ending 31st of March.

[00:14:09]The main problem for Indian refiners is proving that the oil deliveries meet the $60 per cap maximum. Russian crude is purchased on a delivered at port basis, which takes into account the cargo's overall price, including shipping and insurance costs. This makes it difficult to provide evidence of the purchase price of the oil itself on a so-called free to port basis, which banks are demanding. Bankers in India have emphasized that they are demanding only enough to protect themselves from inadvertently violating rules and regulations and the stalemate between refiners and the banks is causing transactions to slow.

[00:14:47]China is expected to import a record amount of crude oil in 2023 due to an increased demand for fuel as people travel more following the removal of COVID-19 restrictions and as a result of new refineries coming on stream. China's crude oil imports may rise between 500,000 barrels and 1 million barrels per day this year to a high of around the 11.8 million barrels per day, which will represent a reversal of the previous two years decline. Apart from meeting growing domestic demand, refiners will also be incentivized to boost runs to keep profitable export shipments flowing and supply more feedstocks to the petrochemical sector.

[00:15:23]And in order to satisfy this increased demand, three new refineries are currently in construction. And in a very interesting development, one of these refineries, operated by Yulong Petrochemical, has signed a deal with BP and Chevron to supply 400,000 barrels of crude oil per day. And obviously, in the context of the 2.5 million barrels of sales per day to Europe that Russia has lost, this contract would have been very appealing. But it's very interesting to note that China has decided to sign more deals with the West rather than taking cheaper, discounted Russian oil. So, this shows that China isn't simply interested in buying the cheapest oil in the market and that it's prepared to do deals with the West rather than extending its relationship with Russia.

[00:16:04]And a further interesting development is that Russia's offline primary oil refining capacity for 2023 is set to increase by 29% or 6 million tons, which equates to around 1.5 million barrels of oil per day. And this announcement is partly in response to the refined oil price cap that was introduced on the 5th of February, which is now impacting on the sale of all of Russia's refined oil products. And as a result of that, they're now needing to process less crude oil through their own refineries.

[00:16:34]And so, the level of idle downtime is now increasing. And the big risk from Russia's perspective is that they may need to close down some of their refineries if demand for refined products falls significantly. And as I've mentioned in other videos, the problem with refined products from Russia's point of view is that India and China, its two biggest target markets, aren't interested in buying finished products. And this issue is highlighted in this chart, which shows the destination of Russian refined exports over the course of the last 12 months.

[00:17:02]And in terms of the color coding on this chart, the very small red section at the bottom represents sales to China. The large blue section above that represents sales to the EU. The yellow section represents future orders. The very small brown section represents sales to India.

[00:17:16]The gray section are other sales, the green section are sales to Turkey, and the two sections above that are the United Arab Emirates and unknown sales.

[00:17:23]And the point of showing you this graph is that the sales to China and India have not increased significantly over the course of the last 12 months. And the reasons that China and India aren't interested in buying refined products are firstly, they're more expensive, so they would rather buy cheaper crude oil, and secondly, they have their own refineries, so they can actually process the crude oil, convert it into all of the refined products, and then either sell that on in the international markets or use it themselves. So, it's much more cost-effective for China and India to buy in large volumes of crude rather than buying the finished product because there's no profit in it. And if we look at this chart, you can see that historically the vast majority of refined products have been sold to the richer European countries. But unfortunately from Russia's point of view, an absolute ban was brought in on the 5th of February. So, going forward, those sales are going to disappear entirely. And the loss of those sales is going to have a double impact on Russia.

[00:18:18]Firstly, these products are the highest margin products because they've been through the refinery. There's more profit in it from Russia's perspective.

[00:18:24]So, they're losing their more valuable sales, but also they're losing the volume that's going through their refineries. And if those volumes fall to a critical level, then Russia may need to close their refineries, and the associated job losses will have a further impact on the Russian economy.

[00:18:42]So, what's the summary and conclusion today? Well, I wanted to post this video really to highlight the problems that the Russian oil industry are facing right now. The sanctions that have been brought in against Russia have been building over the course of the last 12 months. But over the last few months, we have seen the sanctions relating directly to oil really ramping up. On the 5th of December, we saw the outright ban on the purchase of all seaborne oil from European countries. And alongside that ban, a $60 price cap was introduced for all crude oil that Russia was selling over the sea. And those two sanctions were followed up on the 5th of February by an outright ban from European countries on the purchase of all refined products and an associated price cap applying to all of those refined products. And the effect of those sanctions is now having a devastating impact on Russia's oil business. As we've talked about today, Russia needs to find new markets for around 2.5 million barrels of oil per day and it's struggling to do that. And the fact that Russia announced that it was cutting its production levels by 500,000 barrels per day, or around 5% of its total production, indicates the problems that Russia is now encountering. And in addition to that production cut, it's also been leaked that Russia is cutting exports from its western ports by 650,000 barrels per day. So, these are significant numbers. When you look at the value of that oil, it represents around $25 billion worth of sales per year from Russia's perspective. So, these are serious problems that Russia is now facing. And up until now, I think everybody's been assuming that Russia would simply increase its sales directly to India and China to offset all of the lost European sales and everything would carry on as normal. But as we've seen in today's video, the oil price cap is now starting to prove very problematic from India's perspective because all of the finance companies want to make sure that Russia is compliant with that cap to avoid any sanctions being applied against them. And the difficulty that Indian importers are having is actually proving that the price is below that $60 cap and that's going to hamper future imports and therefore will reduce the amount that Russia is exporting to India. And from China's point of view, as we've seen in today's video, China has signed a supply deal with BP and Chevron, which is a surprise because those oil supplies are coming at market prices, which are around 25% above the Russian price. So, China's sending a clear message here that it's not just interested in buying the cheapest oil in the market, which is quite clearly Russian oil because it's trading at a discount. And then it is prepared to do deals with the West going forward, and that's a further blow to Russia in its attempts to increase its sales to China.

[00:21:15]So, the overall summary of today's video is that the sanctions on Russian oil are really starting to hit home and causing major problems for Russia. And I think it's likely that over the course of the next 3 to 6 months, we could see more announcements from Russia that it's having to cut back its production further, because it hasn't been able to find enough markets to keep the volumes the same. And the problem that Russia will have from that point of view is that once you start fiddling around with production, cutting back on the flows, that can cause you major problems in the future when you want to start increasing those flows again. And as I've mentioned in a number of videos before, the problem that Russia has at the moment is that it's cut its trading relationships with a lot of the oil majors. A lot of the oil production facilities in Russia are in areas with extreme climates. And the design and build of those facilities was actually put together by Western companies, such as ExxonMobil, BP, and Shell. Now, all of those companies left Russia following the invasion and no longer provide any support to those facilities. So, if Russia does experience production problems, it may find that it doesn't have the technical expertise or the technology, because technology sanctions have been one of the big areas of focus from the West against Russia. And therefore, if it can't fix the problems in production, it may find that production grinds to a halt, and that could cause a whole world of pain from Russia's perspective. you found today's video useful, informative, and thought-provoking. If you've liked what I've said, then please give me a thumbs up. And thank you for watching this video all the way through to the end.