The Kremlin’s invasion of Ukraine splintered the global energy market into countries that buy Russian oil and those that don’t. Next year could provide hints about how long the split will last.
Through rolling boycotts, expanding sanctions and a novel price cap that took effect this month, Western nations and some of their allies have begun turning away from such imports, pushing Russian producers to find new buyers for millions of barrels of oil each day. Restrictions on diesel and other fuels slated for February could have an even greater impact.
The breakup, placing energy at the heart of an economic conflict running in tandem with the war, has driven Western oil producers from Russian projects and sent Europe scrambling to find new supplies from the Americas, Africa, the Middle East and Asia. It has also pushed the Kremlin toward India, Turkey and China for the energy revenue it needs to fund its war machine and stabilize an economy increasingly isolated from Western goods and services.
Indian refiners in particular have vacuumed up barrels that used to head to Europe. Still, the new sanctions are adding logistical challenges to Russian exports and have contributed to a slowdown at certain ports in recent weeks, according to some traders and ship-tracking analysts. The fast-changing trade routes have brought into focus how various oil markets are emerging with different prices, separate financial systems and increasingly distinct fleets of tankers crisscrossing the globe.
“Now the oil market has been partitioned,” said Daniel Yergin, an energy historian and vice chairman of S&P Global. “What was a market that ran primarily on economic efficiency is now being reshaped by politics and conflict.”
The rift ends a decadeslong era in which the Soviet Union and then Russia pumped vast energy resources into global markets, eventually becoming the world’s largest exporter of crude, petroleum products and natural gas. Even during the height of tensions in the Cold War, the oil and gas kept flowing.
The immediate upshot of the new tensions is a steep discount for Russian crude that Western governments are attempting to make permanent through a price cap of $60 a barrel and related restrictions on financing, transporting and insuring shipments. Russia’s flagship crude, Urals, traded recently atabout $42a barrel when exported from the Baltic port of Primorsk,according to the price-reporting agency Argus Media.
Benchmark Brent crude, in contrast, has lately fetched around $80 a barrel in the physical market. The Urals discount, among other things, reflects the high cost of transporting crude from Russia’s Baltic ports on the weekslong voyage to India—a journey on which many established shipowners are unwilling to embark.
The Russian market is so opaque that many traders say they are unsure how much money producers are earning for their oil. The country’s seaborne exports dropped by 22% in December compared with the average for the first 11 months of 2022, according to the commodities-data firm Kpler, owing in part to harsh winter weather and weak demand from China.
A big question for the energy market in 2023 is whether Russia rebounds to pump as much oil as it did before the war, shorn of Western logistics and technology, or whether its production capacity degrades over time.
Rewiring the oil market has strained a shipping industry set up to ply more-efficient routes. Ultimately, according traders, that is likely to lead to higher gasoline and diesel prices in countries that rely on imported oil.
Sanctions due to take effect in February on Russian refined fuels including diesel will require another complex reordering, along different lines. India and China have no need for Russian diesel, which still arrives in Europe in huge quantities. Traders and analysts say it will likely head to Latin America, Africa and the Middle East instead. Diesel produced in the Middle East and India is already heading to Europe to fill the gap expected in February when the restrictions take effect.
“We think it is going to be more complex on the product side,” said Lois Zabrocky, chief executive of the New York-based tanker operator International Seaways Inc., referring to the European restrictions on diesel and other fuels. The company has decided against transporting Russian exports on its several dozen crude and product tankers.
The tanker industry has to find spare capacity as it divides into two. Low-profile companies have snapped up at least dozens of used tankers to beef up a “shadow fleet” aimed at trading with sanctioned countries including Iran, Venezuela and increasingly Russia.
The cost of chartering ships in the other part of the tanker market, which deals with Western oil companies, banks and insurers, has skyrocketed. At the same time, more ships are arriving late to their destinations or taking longer to discharge cargo.
“That puts the whole oil supply chain under strain,” said Anthony Gurnee, chief executive of Ardmore Shipping Corp. , which operates a fleet of more than two dozen tankers from Ireland.
Though energy ties between Russia and the West have frayed, they haven’t ended entirely. A dribble of Moscow’s gas still arrives in Europe through Ukraine and Turkey. The U.S., in addition, has pushed Europe to ease sanctions on oil so Russian producers are able to access Western shipping and financial services—as long as the oil trades below a certain level and doesn’t head to the West.
The tanker industry has to find spare capacity as it divides into two. Low-profile companies have snapped up at least dozens of used tankers to beef up a “shadow fleet” aimed at trading with sanctioned countries including Iran, Venezuela and increasingly Russia.
The cost of chartering ships in the other part of the tanker market, which deals with Western oil companies, banks and insurers, has skyrocketed. At the same time, more ships are arriving late to their destinations or taking longer to discharge cargo.
“That puts the whole oil supply chain under strain,” said Anthony Gurnee, chief executive of Ardmore Shipping Corp. , which operates a fleet of more than two dozen tankers from Ireland.
Though energy ties between Russia and the West have frayed, they haven’t ended entirely. A dribble of Moscow’s gas still arrives in Europe through Ukraine and Turkey. The U.S., in addition, has pushed Europe to ease sanctions on oil so Russian producers are able to access Western shipping and financial services—as long as the oil trades below a certain level and doesn’t head to the West.
