Russian Oil Is Increasingly Becoming Untouchable for Traders

(Bloomberg) --

Russian oil is becoming even less welcome in the global petroleum market as traders fret over the possibility of a U.S.-led ban on the nation’s supplies, and a latest purchase by Shell Plc drew condemnation. TotalEnergies SE said its traders will no longer buy the nation’s crude.

U.S. lawmakers announced the outline of bipartisan legislation to bar imports of Russian oil into the U.S., though European Union governments are divided over whether to join the action. Traders who handle Russian crude -- spanning both Europe and Asia -- said the possibility of a ban, in conjunction with the response to Shell buying Russian crude on Friday, has made the market more wary of touching the nation’s barrels.

A tension -- between economic imperative and political pressure to respond to the invasion -- is dragging the oil market toward a watershed: Do governments push to keep barrels flowing at elevated prices that are high enough to enrich Moscow, or do they take decisive steps to remove large amounts the nation’s supplies for a prolonged period? The latter approach would risk sending the cost of fuel spiraling, boosting inflation and causing economic damage.

“If Russian oil is not integrated back into the market within the next few weeks, we are at a real risk of having to ration crude and products by the summer,” industry consultant Energy Aspects Ltd. said in a note.

TotalEnergies became the first big oil company to publicly say its traders are halting purchases of Russian supplies. While the company’s refineries will find alternative sources of crude, Total has one landlocked plant that’s still dependent on Russian oil, Chief Executive Officer Patrick Pouyanne said at CERAWeek by S&P Global conference in Houston on Monday.

Fuel Markets

There are already signs that the situation is affecting Europe’s fuel markets -- whether it’s heightened demand in the U.K., Shell restricting some heating oil supply in Germany, or diesel prices that are pointing to shortages. Brent oil soared as high as $139.13 a barrel on Monday before easing to around $123. 

Russia is an oil producing and exporting giant, and global petroleum supplies were already tightening before the invasion. The country is a huge exporter of petroleum to Europe and the continent is heavily reliant on Russia for barrels.

U.S. Secretary of State Antony Blinken told NBC over the weekend that the White House is in “very active discussions” with Europe about a ban. However, EU divisions have been laid bare with several nations, such as Germany, opposing such an abrupt move, while member states including Poland push the 27-member bloc to target fossil fuels, according to people familiar with talks. 

Still, five oil traders in Europe who are normally involved in Russian cargoes said the sanctions threat, and the reaction to Shell’s move, have made any Russia-related business even harder. 

On Friday, after Shell purchased a cargo of Russia’s flagship Urals crude grade on Friday, Ukraine’s Minister for Foreign Affairs Dmytro Kuleba took to Twitter to ask the company whether the oil smelt like “Ukrainian blood for you?” Shell, for its part, said in a statement on Saturday that it bought the Russian crude after “intense talks with governments and continue to follow their guidance around this issue of security of supply.”

Physical Stress

There were no bids or offers for the Russian grade on Monday in a pricing window run by S&P Global Platts. A mostly Kazakh grade that gets exported from a Russian Black Sea port was offered at a record discount of $11 a barrel below a global benchmark for physical oil trades.

In Asia, at least three refiners said that they would cut Russian crude this month from their selections for spot cargoes to be loaded in May, despite the fact the barrels are expected to be on offer at increasing discounts, according to traders. The processors are regular buyers of grades shipped from Russia’s Far East such as ESPO and Sokol, and two of them already bought shipments for loading this month and next.

Prices of actual physical barrels have surged more than oil futures and some Asian refiners are already mulling cuts to processing rates as early as next month. Buyers are likely to seek alternative barrels from other regions -- most likely the Middle East and maybe even from the U.S. -- to compensate for the loss of Russian crude. 

A May-loading cargo of Sokol crude from the Russia’s Far East was offered at a steep discount of as much as $14 a barrel below the region’s Dubai benchmark, according to traders. Dubai oil itself is already significantly cheaper than Brent, a marker in Europe. 

Asia’s physical crude market will begin trading in the coming days as Middle Eastern producers follow Saudi Arabia and release their official selling prices, and after term oil allocation details from some producers are issued.

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