Russian refiners are bracing for the impact of the European embargo for their petroleum products including base oils and lubricants – the first such restriction in the modern history of Western relations with the country. The outlook for refiners is bleak, an industry insider said.
European Union sanctions on imports of crude oil from Russia, amplified by a price cap on the tanker shipments agreed by G-7 countries, took effect Dec. 5. Similar sanctions, due Feb. 5, are set for the petroleum product imports.
“The embargo on these shipments will have a serious impact on the activities of Russian base oil refiners, having in mind that Europe is one of the main markets for base oils coming from the country,” Denis Varaksin, business development manager at DYM Resources, a base oil trading company in Berlin, told Lube Report on Monday.
“Even this year [Russian API] Group I and Group III base oils were heading to the EU mostly via Latvia or vessels shipments from the ports of Vyborg and Svetly in Kaliningrad,” he said
Prior to Russia’s February invasion of Ukraine, Russia was exporting around 1 million tons of base oil annually, the largest portion of which was shipped to European markets. Ukraine was an equally important market for Russia, consuming around 100,000 tons of Russian base oils annually, but the war stopped economic and trade activities between the two countries.
Varaksin does not believe that the same export volume can be realized in 2022, and expects Russian base oil shipments this year to be 20-30% lower than before the war.
“Russia will have to reduce export and redirect flows to the Black Sea, where the main buyer now will be Turkey,” he said. Some buyers in Turkey are expected to resell the material to third countries.
“Russian base oil marketers are also redirecting sales to other friendly countries such as India, the United Arab Emirates and Brazil,” Varaksin said.
“These are big importers, and they can [potentially] absorb the Russian product, bit it has to be sold at a discount,” he said, adding that the discount will depend on market conditions and freight costs.
“Having in mind that the market currently is relatively well supplied, I assume the discount will be around 10%,” Varaksin said. “Also, freight costs to India and Brazil are much higher compared to deliveries to Europe,” which will reduce profits for Russian producers by another 5-10%.
The crude oil price cap of U.S. $60 per barrel set by the G-7 countries stipulates that buyers of cargoes from Russia will be allowed access to industry standard insurance and several other critical shipping services if they do not exceed the cap.
Russian finance minister Anton Siluanov warned Tuesday that the price cap can lower Russia’s export revenues and increase the federal budget deficit, previously projected at 2% of the country’s gross domestic product.
Russia’s central bank acknowledged that the price cap is a “new shock” for the Russian economy.