China starts to reject its favourite Russian oil grade following US sanctions
The price of a key grade of Russian crude oil has fallen after Western sanctions forced Chinese refineries to cancel some of their purchases.
Source: Bloomberg
Details: Spot cargoes of ESPO, shipped from the Russian Far East, were being offered this week at a discount of 50 cents per barrel against the ICE Brent benchmark. Last week the grade was trading at a premium of over US$1 per barrel – until the latest round of sanctions was imposed.
The oil market is keeping a close eye on disruptions and shifts in supply flows following the US's blacklisting of Rosneft and Lukoil to increase pressure on Moscow.
This move, which followed tighter EU restrictions on energy trade, was behind a rise in benchmark futures last week, as refiners may be looking for alternative barrels.
ESPO is favoured by both Chinese state-owned refineries and private refiners with experience of processing sanctioned crude such as Iranian oil. Following the US sanctions, Chinese state companies, including Sinopec, cancelled some purchases of Russian seaborne crude, mainly ESPO.
According to Vortexa Ltd, private refineries typically take about 800,000 barrels per day of Russian Far Eastern grades – ESPO, Sokol and Sakhalin Blend – and this demand will "remain robust". However, it is not yet clear whether they will be able to absorb the volumes that other refiners have declined.
Background:
- The US has sanctioned Russia's largest oil firms, Rosneft and Lukoil, and their subsidiaries.
- On the morning of 23 October, the European Union formally approved its 19th Russia sanctions package.
- Indian company Reliance Industries Ltd. purchased millions of barrels of crude from the Middle East and the US after the US sanctioned Rosneft and Lukoil.
- Indian oil refineries have placed no new orders for Russian oil since the fresh sanctions came in and are awaiting clarification from the government and suppliers.
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