The EU does not want a single drop of Russian oil in its market

The European Union (EU) has recommended that oil importers indicate in sales contracts that the batch sold does not contain oil of Russian origin. If the Russian raw materials are revealed, the supplier will be liable, according to the clarifications dated August 3 in the official journal of the EU.

At the beginning of July 2022, the European Commission promised that it would ban the supply of Russian oil to the EU, even as part of mixtures. It was planned to analyze each case of such deliveries and make a decision on the embargo depending on the “share of the Russian component.”

The British Shell had previously used such a scheme to circumvent sanctions on Russian energy resources: in April, Bloomberg sources said that traders began trading in the so-called “Latvian oil mixture” (“Latvian brand”). According to sources, Shell did not consider a mixture of several grades of oil originating from the Russian Federation if the share of the Russian Urals brand in it occupied less than 50% of the volume. The blend was named Latvian, because the mixing of oil from different suppliers took place in the port of Ventspils, Latvia.

In early June, the EU member states, after the start of a special military operation (SVO) in Ukraine, agreed on the sixth package of sanctions against Russia, which included an embargo on the supply of Russian oil and oil products by sea. The ban on the supply of crude oil will come into force on December 5, 2022, on the supply of petroleum products on February 5, 2023. The ban on the supply of oil through the Druzhba pipeline to landlocked Hungary, Slovakia and the Czech Republic is planned to be introduced later. In early March, the United States and Great Britain imposed a complete ban on oil supplies from Russia, in connection with which Moscow began to redirect fuel to Asian markets, Vedomosti wrote earlier.

After the imposition of sanctions, Russian oil became profitable for buyers, as the discount on Urals to Brent amounted to about $30/bbl. (Before the NWO, a barrel of Urals was usually sold a few dollars cheaper). As a result, India and China increased their purchases of Russian fuel: in May, Russia exported 55% more oil to China in annual terms and became the country’s largest supplier, overtaking Saudi Arabia, Reuters reported earlier. With the high cost of reference varieties, even with a discount, export remains profitable for both Russian oilmen and the budget (Vedomosti wrote about this on June 20).

The EU clarification dated August 3 also states that Russian oil, which is supplied to the EU mixed with fuel from other countries, is subject to sanctions. “If the importer cannot prove the exact content of Russian oil in the mixture, the entire shipment will not be allowed to ship,” the EU magazine says. If the supplier can accurately indicate the proportion of oil of non-Russian origin, he will be allowed to ship the corresponding part of the lot to the EU. It is possible to confirm the share of non-Russian oil with the help of evidence of the origin of oil or its chemical analysis, follows from the explanations.

The EU recommended that the customs authorities of the union check documents on the origin of fuel in order to prevent anti-Russian sanctions from being circumvented. Also, carriers, insurers and financial institutions that open lines of credit or issue letters of credit were advised in the EU to “exercise due diligence” and not to engage in the transportation and insurance of the transportation of Russian oil to the European Union.

Yaroslav Kalugin, a trader in the department of operations on the stock market of IC Veles Capital, explained that Iran has long been using schemes similar to the creation of a “Latvian mixture” to bypass sanctions on oil. Determining the country of origin of oil and the presence of Russian fuel in it is problematic if, according to the documents, it has nothing to do with Russia: it could have been reloaded in neutral waters. “The only question is what will be the discount for such supplies, since, given the size of the market, such schemes are a very profitable business for those who serve them. In addition to this, for a variety of reasons, the energy market will remain in short supply in the near future, which means that Russian oil, like any other, will be in full demand,” the expert noted.

A representative of the Energy Development Center agrees that Russian oil entering the EU from third countries is possible: “Traders will indicate the share of Russian oil in the mixture from Asian countries while maintaining discounts on Urals at $30-40 per barrel.” He added that India also supplies Europe with small volumes of refined oil products from Russia, which “de facto are no longer Russian oil.” Of these, European refineries can produce gasoline and diesel at plants that, by the time the oil embargo comes into force, will not have time to switch to other brands of oil.

According to Kalugin, the discount on Russian oil is likely to remain within the current limits – $25-35 per barrel. The expert considers it unlikely that Urals prices will catch up with Brent or the discount will be reduced to a minimum of $5-10. The price of Russian oil is based on the risk of secondary sanctions for buyers and increased logistics costs (including bypassing restrictions when it comes to deliveries to the US or Europe), Kalugin explained.

Senior analyst Alfa Bank Nikita Blokhin believes that the EU measures will not significantly affect Urals prices. According to him, the discount on Russian oil in February-March reached a peak of almost $40 per barrel, in June it dropped to $30, and in July it amounted to about $24. According to Blokhin, this trend will continue, by the end of the year the discount may drop below $20 per barrel as new supply chains are built to Asian markets.

A spokesman for the Energy Development Center noted that Brent and Urals prices are unlikely to equalize until anti-Russian sanctions are lifted or significantly eased.