Why is Russia already caught in its crude?

Raw materials
Why is Russian oil becoming a slow seller

PCK refinery in Schwedt. PCK Refinery is supplied with crude oil from Rosneft in Russia via pipeline

© IMAGO / Jochen Eckel

Western sanctions do not prevent companies from buying crude oil from Russia. The effect of signals still works: even the oil giant Rosneft is now having difficulties finding buyers

Oil is required. However, this does not change the fact that Russian producers are finding it increasingly difficult to sell their oil. Energy giant Rosneft failed spectacularly in an attempt to sell 38 million barrels of oil. For classification: a barrel of just under 159 liters, the presented quantity will fill a fleet of 19 large tankers.

Rosneft offered oil at an auction last week. This is the standard method in the oil market. They aim to achieve the highest possible price. According to the “Wall Street Journal”, in addition to 5.1 million metric tons of the Russian Ural variety, much smaller quantities of other types of oil were also shown. Raw materials must be shipped from Russian ports on the Baltic and Black Seas and delivered in May and June.

As common as auctions are, one of Rosneft’s conditions was unusual: oil must be paid for in rubles. This requirement could have been the main reason for the failure of the oil giant to find a buyer. Perhaps the background to the demand is President Vladimir Putin’s order to pay Russian energy supply bills in rubles in the future.

But even without the ruble demand, Russian oil companies have struggled to find buyers in recent weeks. Surgutneftegaz and Zarubezhneft failed at auctions, and Rosneft disposed of oil only at a significant discount.

Multinational oil companies do not deal with the Russians

Western companies are increasingly falling out as clients. Although they are still allowed to buy oil from Russia, they are actively looking for alternatives. Before the attack on Ukraine, Germany got about 35 percent of its oil from Russia. According to Federal Economy Minister Robert Habeck, this share of oil imports has been reduced to about 12 percent. The goal is to completely phase out Russian oil as quickly as possible.

Russia has become so toxic to Western multinational oil companies that Shell and BP, for example, no longer buy Russian oil. They part with investments and property in Russia, and therefore write off billions. Commodity traders, such as Switzerland’s Vitol Group, are also halting oil deals with Russia.

Against this background, Russia is looking for alternatives. India in particular is increasingly buying Russian oil from major oil consumers. But the failed auctions show that European customers cannot easily be replaced by others. In addition, the principle of supply and demand applies to the market. The less interest in Russian oil, the lower the price. So Russia has to accept discounts on its oil.

The price difference between Russian oil and other producers is huge. The price of a barrel of Urals is usually about 60 cents lower than the price of a barrel of Brent North Sea. The price of a barrel is currently about $73, which is $32 cheaper than its competitor from the North Sea.

The state budget depends on energy revenues

A failed auction does not mean that Rosneft cannot find buyers for its oil at all. Interested parties who, according to the Wall Street Journal, came from the Asia-Pacific region, have registered for the auction. This can be seen as a sign that they are willing to do business with Rosneft despite the Russian attacks in Ukraine.

In the future, Rosneft will likely sell less oil at public auctions and more directly to buyers, who can then stay under the radar. But it also means that the negotiating position of the Russians is weaker and they have to accept price cuts.

This is bad news for the Kremlin. The Russian economy is increasingly suffering from Western sanctions. As a result, the government became more dependent on Rosneft’s revenue. The multinational oil company is the largest taxpayer, and alone, according to its data, contributes a fifth of the national budget. According to the International Energy Agency, Russia’s total oil and gas exports last year financed 45% of the budget.

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