The upcoming Russian struggle for new markets for its oil

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Russia can increase its domestic energy consumption and boost its exports to new markets after some “unfriendly” countries rejected Russian oil. So says President Vladimir Putin. It sounds simple, but it will be much more difficult in practice once the next wave of restrictions on Moscow’s oil trade take effect.

So far, there has been little obvious impact on the volume of crude from Russian export terminals. While sea shipments dwindled in the first weeks after Russia invaded Ukraine, there was no sudden collapse. And the rate of exports jumped in the first week of April, partly thanks to the easing of storms in the Black Sea, which had led to a backlog of ships waiting to be loaded in a key port.

What has changed, however, is the destination of many of these ships. There has been a sharp increase in the number of cargoes bound for Asia from Black Sea ports, the Baltic and even, in one case, the Arctic port of Murmansk. Crude flows to Asian countries from Russia’s western ports surged from zero in the weeks before the invasion to 875,000 barrels a day in the first full week of April. This is almost as much as the combined daily shipments from Russia to Germany, France, Greece, Italy and the UK before the invasion.

While Russian oil companies were expected to offer deep discounts of more than $30 a barrel to sell crude in Europe, they did not offer the same price reductions to buyers in India. That is likely to change, however, as state-run oil refiners switch to privately negotiated deals in search of better terms, instead of buying through public tenders.

But there will likely be a limit to how much Indian refiners will buy from Russia. Rising imports of Russian crude will displace purchases from elsewhere and buyers are likely to be wary of damaging relationships with their traditional suppliers in the Middle East. This may limit the volume they are willing to take out of Russia.

There is also the question of the chemical composition of the crude. Every crude oil is different and refineries operate more profitably when processing a specific grade of crude or a blend of grades. Increased volumes of Russian crude are expected to displace crudes of similar quality, in terms of gravity and sulfur content, which could also limit the volumes refiners are able to take.

Increased crude flows from western Russian ports to India and China, perhaps offset by higher flows of Persian Gulf crude to Europe, will also put a strain on oil markets. The greater distances involved will tie up more ships for longer periods of time with each delivery. It takes three times longer to transport a cargo of crude from the Russian port of Novorossiysk on the Black Sea to Sikka in India than to deliver it to Trieste in Italy.

From the Baltic, which has become Russia’s main outlet for westward shipments, the increase is even greater. It takes a day or two to deliver crude from Primorsk or Ust-Luga to Finland, Lithuania or Poland, and about a week to ship it to the Netherlands or Germany. A trip to the west coast of India takes a month, to the east coast even longer. Given Russia’s pre-invasion mix of destinations for its Baltic Sea crude exports, a complete diversion of flows to India would require five to six times as many ships as typically used. The increase in demand will push up prices, good news for shipowners, but bad news for those who will have to absorb transport costs.

The increase is similar for shipments from the Russian Arctic port of Murmansk. Most shipments make a week-long trip to Rotterdam. One is now on a month-long trip to Paradip on the east coast of India. Others may be forced to follow as the EU begins to toughen its stance on Russian oil imports.

Where else could Russia sell its crude?

One possibility is China’s strategic stock, if it’s willing to offer deep enough discounts to make shipments attractive to the country’s price-conscious buyers. It has even been suggested that Middle Eastern oil producers could buy cheap Russian crude to process at their joint venture refineries overseas, freeing up more of their own barrels for export. Big discounts could make this an attractive proposition; volumes could reach 200,000 barrels per day.

But if Europe is serious about weaning itself off Russian crude, Moscow will have to find markets for much more than that. About 1.8 million barrels per day of Russian crude were shipped to European ports before the invasion of Ukraine.

Using more in Russia only makes sense if the country has something productive to do with it – it will require boosting industry, which seems unlikely.

Increasing sales to Asian buyers, who show no aversion to buying Russian rough, is a seemingly attractive solution. But it will cost Russia far more than selling to high-paying European buyers on its doorstep.

More from Bloomberg Opinion:

• The fragility of Russia’s fortress economy: Marques & Johnson

• Russian default is a matter of when, not if: Marcus Ashworth

• The second wave of the Russian oil shock begins: Javier Blas

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously, he worked as a senior analyst at the Center for Global Energy Studies.

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