The G7 price cap on Russian oil products that went into force on Feb. 5 will likely lead to “on-the- water stock buildup” as buyers, sellers, insurers, shipowners and banks await clarity on the legality of dealing with these supplies, the head of Vitol Asia said Feb. 5.
“There will be on-the-water stock build to the extent the uncertainty remains over what aspects of the supply chain are going to feel the pinch,” Mike Muller told the Gulf Intelligence daily energy podcast. “The sanctions will not be on the buyer necessarily or the seller. They will also impact in a big way the shipper or shipowner and insurance provider. The market now needs to scrape around for insurance providers that are not from the G7 and the same goes for shipping. Then finally there is the banking channels.”
The G7 and Australia announced Feb. 3 price cap levels for Russian refined oil products ahead of new sanctions kicking in to ban EU countries from importing seaborne Russian petroleum products as part of the continued global response to the war in Ukraine.
EU prohibitions on vessels and other maritime services needed to transport Russian petroleum products also came into force on Feb. 5. Price caps, already in place for Russian crude following a Dec. 5 EU ban on seaborne Russian oil imports, have been devised as a carve-out for EU and G7 maritime service providers to continue aiding with the seaborne transport of Russian fuels as long as they are sold at or below the cap levels.
Asian banks wary
Under an agreement reached among a coalition of countries, the G7 will impose price caps of $100/b on imports of Russian products that typically trade at a premium to crude, such as diesel, kerosene and gasoline, and $45/b on products like fuel oil that generally trade at a discount to crude.
The price cap coalition includes Australia, Canada, the EU, France, Germany, Italy, Japan, the UK and the US.
Banks in Asia are wary of providing financing for Russian transactions due to the price caps and bans, Muller said.
“There is a hesitancy I detect among Asian banks here in Singapore certainly right now until there is further clarity from their legal advisors as to what the ramifications are if they start paying ultimately for supplies of Russian (oil products) when new rules are being introduced by the G7 forbidding certain transactions,” he said.
The G7 price cap on Russian oil products will also drastically change flows of supplies and maybe even create new demand and lead to shortages, he added.
“The world is going to have to realign and redirect its refined products that come out of Russia from the Baltic and the Black Seas all the way to Asia: that is a much, much longer voyage that will see a phenomenal stock buildup on the water which accounts for or takes away the best part of a whole month’s worth of exports and that’s another form of demand,” Muller said.
Most of the Russian crude has found its way to countries such as India, China and other Asian consumers.
Overall refining margins are “astonishingly good still and looking relatively resilient,” and they do not reflect any “recessionary fears” or “demand implosion,” Muller said.
Currently, refining margins reflect “a world where some are expecting close to a 2 million b/d year on year demand growth for refined products, with diesel leading the way and the overhang of the very great concerns that maybe the world will not be seeing quite as much Russia (oil products) and maybe the large diesel exports that may be coming from China have also downsides if the Chinese demand accelerates.”
`Not a bad oil price’
Muller is upbeat about China because the end of the zero COVID-19 policy that began unwinding in December led to a flurry of activity around the Lunar new year, giving traders confidence about revived Chinese energy demand.
“China has the capacity both in refining and certainly petrochemicals to run a lot harder and if you look at the behavior of major Chinese protagonists, they certainly accelerated their purchasing, which is a trend that started in December for crude oil,” he said.
“That has given the market a lot of confidence that China intends to run hard and to have the availability of products to cover…and that they might need more domestically than they (previously) thought.”
An uptick in Chinese oil demand may keep propping up oil prices, which have hovered around $80/b in recent weeks, he added.
“I think the move up from lower $80s to high $80s was probably most supported by continued reassurance and confidence in Chinese demand for energy,” Muller said.
“$80/b is not a bad price for OPEC+. I think it’s the price that works for most in a world that still has elements of fragility to it.” Platts-assessed Dated Brent was $80.62/b on Feb. 3, according to S&P Global Commodity Insights data.
Source: Platts