Markets live, Thursday, March 3, 2022


Global oil markets are in a state of flux unlike anything traders say they have seen in recent years as they grapple with the sudden disappearance of tradable products from the world’s second-largest exporter.

The invasion of Ukraine quickly made Russia a trading pariah, forcing most buyers and shippers to avoid shipments of its crude oil, diesel, heavy naphtha and vacuum gas oil. This causes abrupt changes in market structures, upheavals in prices and violent fluctuations in freight rates.

The result is a physical crude market that is too chaotic even for veteran oil traders who have spent years deftly managing everything from political sanctions to trade wars and attacks on key infrastructure. In the current climate, traders say, even something as simple as a seller knowing what price to offer their crude at has become confusing.

A Russian pile-laying vessel on deployment for the now abandoned Nord Stream 2 gas project. Credit:PA

“Geopolitics are limiting supply chains and keeping markets on edge,” said John Driscoll, Singapore-based chief strategist at JTD Energy Services Pte. Wild swings in intraday trading ranges, volatility and backwardation are “scary”, he said.

Commodity markets have been disrupted since the invasion. Although the sanctions have not directly targeted Russian energy exports, trade has stalled due to a reluctance to buy the country’s raw materials. Oil majors, international banks and shipowners are attracting investment and financing, making it difficult for refiners and traders to secure lines of credit and the vessels needed to continue their usual purchases of oil grades like the Urals , ESPO and Sokol.

Russia accounted for 12% of total global crude exports in 2020 and nearly 10% of petroleum product shipments. Oil trading giant Trafigura Group tried this week to sell a flagship quality cargo from the Russian Urals at a record price compared to benchmark prices for northwestern Europe, but found no bidder, pointing out how toxic trade with the country has become.

Asian refiners are trying to get more oil from the Middle East, although additional supplies from the region are very limited, traders said. More US shipments are also on the way, but offsetting, skyrocketing freight costs and wild discrepancies in global benchmarks make that difficult. Their European counterparts are looking to buy more North Sea crude, which could crowd out Chinese and South Korean refiners from that market, traders said.

For oil sellers not affected by the sanctions, wide geographic spreads, high shipping rates and record premiums for prompt delivery make it difficult to know how high to price their offers, traders said.

In the fuel markets, the invasion of Ukraine has caused large discounts, a market structure where quick supplies are more expensive than late shipments. Buyers are struggling to find substitutes for Russian diesel, as well as heavy naphtha, mainly used by the petrochemical industry, and vacuum gas oil, a raw material for gasoline production.

Russian exports of these products are generally destined for buyers in Asia, Europe and the United States. There is no immediate answer to the question of where to find alternatives, as fuel stocks have rapidly dwindled in recent months, traders said.



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