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MNI Commodity Weekly: Russian Officials Signal Sanctions Weighing on Oil Flows

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aerial photography of tanker ship

Executive Summary:

Russian Officials Less Defiant as Western Sanctions Weigh on Export Abilities: Russian officials sounded a less upbeat tone this week, citing insurance concerns as a problem for Russian oil and product outflows as well as further remarks on sanctions hitting production this year.

Oil Markets: Crude has resumed its recovery this week, supported by issues in getting Kurdish oil to market that is now hitting production. Banking concerns that spurred the recent sell off have also somewhat settled for now.

Gas Markets: Europe is breathing a sigh of relief, surviving its first winter without Russian piped flows but all eyes are now on the refill season. Longer term fuel switching and demand cuts weigh on European prices while a lack of Asian interest in LNG weighs on US cargoes at present. Europe is forecast to scoop up the lions share of those this summer.


Russian Officials Less Defiant as Western Sanctions Weigh on Export Abilities:

Russia has ridden out western sanctions better than expected so far, diverting oil primarily towards Asian buyers but further comments from Russian officials this week suggest the Kremlin is starting to feel the strain and set the precedent for barrels falling off the market in the coming months.

  • Russia needs new insurance and re-insurance mechanisms for its oil exports, Deputy Prime Minister Alexander Novak said Tuesday. This is one of the most public acknowledgments yet that G7/EU sanctions are complicating the nation’s petroleum sales having usually struck a more defiant tone that they have easily found new buyers.
  • Novak said at the energy ministry’s annual meeting that new insurance mechanisms need to be found that would be accepted by its foreign trading partners. He added that Russia is targeting new markets in Asia-Pacific, Latin America, Africa and Central Asia.
  • Gazprom Neft CEO Alexander Dyukov said that this year is likely to be more difficult for Russian oil exports than last year because of strong sanctions pressure. Russia needs to “develop independent insurance of cargoes, ships and liabilities,” he said. He added that Russia needed new independent mechanisms for pricing its oil and petroleum products – a nod that Russia wants to move away from the current method of offering significant discounts to global benchmarks to attract buying interest.
  • On a more upbeat signal from the officials, Russian Energy Minister Nikolai Shulginov said that Russia had managed to completely redirect the entire volume of oil exports affected by sanctions – the issue is now whether than can be sustained and for how long.
  • Redirection to new markets may have worked short term but it has come at the cost of far longer voyages for Russian oil tankers, clearly visible in soaring oil on the water volumes (see chart). Floating volumes of Russian oil and oil product have been fairly limited so far, suggesting Russia has been successful in placing volumes but the fleet is being stretched regardless and its only likely to worsen.
  • Commodity traders such as Trafigura have warned that the redirection of flows will increasingly build inefficiencies into Russia’s fleet – especially if volumes are forced into floating storage, tying up more effective capacity.
  • In the clearest indication that Russia will not be able to hold up its oil exports longer term is further commitments to cut domestic production. Initially, the 500,000 bpd oil production cut was touted for March but Novak confirmed last week it is being extended until at least the end of June.
  • It is important to remember that the fallout from Russian sanctions is a key factor being watched by OPEC to direct its future production quotas. At present, the group appears set on maintaining existing production targets as it waits for further evidence of how Russian sanctions pan out - as well as how Chinese demand rebounds. OPEC+ is likely to stick to its deal on output cuts of 2 million bpd until the end of the year. OPEC+ is due to hold a virtual meeting of its ministerial committee, which includes Russia and Saudi Arabia, on April 3 before a full ministerial meeting in Vienna on June 4.
  • Overall indicators show mounting pressures on Russian oil and oil product exports for the remainder of the year whilst it also pushes hard to try and secure the Power of Siberia 2 pipeline deal with China to ensure it can offload gas supplies – a move which even if successful would not be implemented until the end of the decade. The above factors all point to Russian production cuts being sustained this year until more robust infrastructure developments are in place while China gauges whether it wants to rely on Russia as a long term energy partner.


source: Bloomberg


Oil Markets:

Crude has resumed its recovery this week, breaking above the higher end of the trading range from last week after a brief fall on Friday back down to 72.72$/bbl. Prices were spurred Monday on approximately 450,000 bpd of Kurdish crude unable to flow out of Turkey because of an arbitration decision that said Baghdad’s consent was needed to ship the oil. The flows stopped Saturday and no solution has been concluded Wednesday forcing production cuts due to a lack of storage.

  • Also driving markets on the supply side were more pessimistic comments from Russian officials Tuesday that sanctions were causing difficulties for the Kremlin – having usually spoken in more defiant terms (see above story).
  • The market remains focused on economic concerns and recessionary fears, although signs of stability in the financial markets and easing banking sector uncertainty has allowed crude prices to regain some ground.
  • The Brent crude curve is in backwardation but is softer than earlier this month with the focus on economic concerns and global oil demand and resilient Russian oil output rather than optimism over the recovery in China which is widely expected in the second half of this year. Long dated time spreads are following the front month futures moves with Dec23-Dec24 above the highs from last week of 2.97$/bbl. The prompt WTI spread is still trading in contango suggesting plenty of supply available to cover demand in the near term.
  • Bearish market concerns are highlighted by the large call-put skew, especially at the front end of the curve and the significant reduction in managed money net long positions. At the start of this week the second month Brent 25 delta put volatilities were holding a premium of about 7.5% over call volatilities while the Dec23 puts had moved to as much as 6.1% over the calls.
  • Nymex WTI net longs last week fell to the lowest since 2016 while ICE Brent net longs fell back to the lowest since early January after gaining during January and February - boosted by an expected demand recovery in China this year.

source: Bloomberg


Oil Products:

Diesel crack spreads have softened over the last week with restricted fuel supplies in Europe due to French strikes and Russian sanctions offset by weak demand concerns, strong Russian output and increased Asian supplies to Europe and the Americas. Russia’s diesel exports are on track to hit a record this month despite EU sanctions.

  • Near term Gasoil spreads have eased back from the highs of last week as Europe looks to imports to cover for the French refinery outages and missing Russian imports. Tight supplies have been eased by lower-than-normal outages due to spring maintenance. The prompt spread has fallen back from a peak of 35$/mt last week.
  • Gasoline margins are at their highest since Jul 2022 in the run up towards the US summer driving season and with the switch to summer grade gasoline. Prices are also supported by a gradual rebound in US gasoline demand and below normal US inventories.

Gas Markets:

European gas markets are slowly trending back up this week with stable supplies allowing storage injections despite ongoing disruption to French LNG imports and small outages to Norwegian imports. A mixed weather forecast and slow return of Freeport LNG are also providing some support to prices recovering from a low of just below 39€/MWh on 20 March.

  • Total European LNG sendout averaged just over 400mcm/d last week with industrial action at French terminals continuing to cause cargo diversions within Europe. Operations at Elengy’s three LNG terminals was halted on 6 March with output offline until 31 March but likely to be pushed back further with no resolution in sight.
  • Norwegian imports are expected to drop this week with a small reduction at Troll and Gullfaks at the start of the week followed by a reduced flow from Aasta Hansteen later in the week.
  • Total European natural gas storage looks set to finish the winter season at the end of March at around 56% compared to the five-year average of 34.0% after recent injections from 22 March to 25 March.
  • Pipeline deliveries show daily changes to flows to Freeport LNG up to about 1.59bcf/d Tuesday, suggesting the facility is still only up at approximately two thirds of the full operational capacity of around 2.1bcf/d.
  • Ample US natural gas supplies are weighing on prices in the near term but expected LNG export increases are giving support to longer dated contracts with numerous projects planned to commence operations from late 2024 onwards. Front month Henry Hub has fallen from nearly 4.5$/mmbtu at the start of the year to around 2$/mmbtu. Steady production, a warm winter and curtailed LNG exports have all helped build storage levels and push near term prices lower.
  • Longer term prices are more supported with summer 2025 and 2026 trading at a premium to summer 2023 with prices up around 4$/mmbtu.

source: Bloomberg


Oil Market Calendar:

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