Daily Energy Report
India’s oil imports from Russia, Russia diesel exports to the Arab Gulf States, Russia’s budget deficit, EU windfall taxes, and more
CHART OF THE DAY: Neutral for oil
Figure (1)
India’s Crude Oil Imports from Russia
Source: Kpler, 2023 and EOA, 2023
Commentary
India’s crude oil imports from Russia have substantially increased in recent months, and they are expected to hit a record high in the coming weeks. However, and based on data from Kpler, this has been at the expense of crude oil imports from Latin America, mainly Brazil, Colombia, and Mexico, in addition to other countries such as the US, Saudi Arabia, the UAE, and Nigeria.
EOA’s Main Takeaway:
The US and the EU do not want to see Russian oil barrels exiting the market to keep prices from skyrocketing. Western sanctions, meanwhile, have reshuffled global oil flows, and India’s imports of Russian crude have freed up oil from other producers ( such as Saudi Arabia, Nigeria, and others) for those who do not want to touch sanctioned Russian cargoes.
Moreover, sanctions on Moscow’s oil industry, and the emergence of new destinations for Russian oil exports, all have made the oil market inefficient. But now we are seeing some improvement in the market’s efficiency under sanctions relative to previous months, and this is partly reflected in India’s decision to drop long-distance imports from South and North America, as well as West Africa, and buy cheap Russian oil instead.
STORY OF THE DAY
REUTERS: Russia begins diesel exports to Saudi Arabia -traders, Refinitiv data
REUTERS: Russia exports record diesel volumes to Brazil in Feb- traders, Refinitiv data
REUTERS: Russian crude oil heads to UAE as sanctions divert flows
Summary:
According to Refinitiv data carried by Reuters, at least three cargoes laden with 190,000 tons of diesel left the Russian Baltic port of Primorsk last month for Saudi Arabia. Meanwhile, Russia’s ultra-low-sulfur diesel shipments to Brazil climbed to a record high in February, Reuters reported, around a month after an EU embargo and G7-led price caps on Russian oil products went into effect. Another report by Reuters also shows that the United Arab Emirates has been importing more shipments of Russian crude oil.
EOA’s Main Takeaway:
The world needs Russian oil. The US and the EU even want Russia to continue exporting crude and petroleum products. In their turn, Moscow and Russian oil companies want to continue exporting oil while trying to maximize revenues.
Regarding Russian diesel, some of it contains a high percentage of sulfur. It makes sense, in this case, to send it to complex refineries that can remove sulfur and refine it further, such as those in Saudi Arabia.
Additionally, while Russia hasn’t drastically curtailed its production, to the surprise of some pundits, it seems that some OPEC members view Russian oil as cheap relative to future oil prices, and for this reason, they’d rather keep their oil in the ground and sell it at higher prices in the future.
NEWS OF THE DAY
1- REUTERS: Germany's Schwedt refinery losing out in race from Russian oil
"Slashed output at Germany’s Schwedt oil refinery demonstrates the difficulty Berlin faces in turning away from Russian oil, despite plans to work with Poland to find alternative supply," Reuters wrote on Tuesday.
EOA’s Main Takeaway:
Since Russia’s invasion of Ukraine, Germany’s policies have been harming its own interests. Finding a replacement for Russian oil is easy but finding a replacement where the margins are high enough to justify operations is difficult. This is the price Germany has to pay for its political decisions.
2- BLOOMBERG: Russia’s Budget Deficit Hits $34 Billion But Spending Growth Slows
During the first two months of 2023, Russia’s budget deficit experienced a jump, Bloomberg reported. Spending, however, "showed signs of growing at a slower pace" considering the war in Ukraine, the report added.
Bloomberg cited the Finance Ministry as saying that the "shortfall reached 2.58 trillion rubles ($34 billion), with expenditure at 5.74 trillion rubles."
EOA’s Main Takeaway:
The news raises the following questions:
1- How will the government fill the gap? Will it start using savings from previous surpluses? Will it sell gold?
2- What will the impact be on the oil and gas sector? Will the government reduce taxes to maintain exports? Or will it increase taxes at the expense of lower exports?
Our view is that Russia will likely succeed in managing its finances this year. However, in the event of a global recession in 2023, this will then prove to be disastrous for Russia, and it may also affect OPEC+ cohesion.
3- REUTERS: Environmentalists sue to stop Gulf of Mexico oil and gas auction
Environmental groups have sued the US administration in attempt to stop the sale of oil and gas drilling rights in the Gulf of Mexico, Reuters reported.
EOA’s Main Takeaway:
While this was expected, a new trend is emerging: the growth in global offshore activities. Environmentalists must understand that if they block exploration and drilling activities in the US and Europe—where they can monitor such activities and influence them— companies will move to developing countries where environmentalists have no control.
4- REUTERS: U.S. energy envoy Hochstein says Russian oil price caps working
"I think the beauty of the process is that it is working and that Russian oil and Russian products are being traded below the price cap,” Reuters quoted U.S. Senior Advisor for Energy Security Amos Hochstein as telling reporters on the sidelines of an energy conference in Houston.
EOA’s Main Takeaway:
Claims that price caps are working amount to propaganda. Price caps work when they are well-enforced and below the market price. That’s not the case with the G7-led price caps on Russian oil.
5- REUTERS: Venezuela to consider crude production bump with Russia's Rosneft, minister says
Venezuela is working on a plan to raise crude production with Russian oil company Rosneft, Venezuelan Oil Minister Tareck El Aissami said, according to Reuters.
EOA’s Main Takeaway:
Moscow is reaching out to any country that can purchase or store Russian crude. Venezuela is a perfect target given that it needs gasoline, diesel, and condensate.
6- BLOOMBERG: EU Is Closer to Forming a Gas Buyers’ Cartel
“Europe is getting its act together in a bid to both lower energy bills and ensure stable gas supplies after Russia cut flows to the region,” Bloomberg cited the European Commission Vice President Maros Sefcovic as saying in an interview. In April, the EU is expected to open its first tender where private businesses and governments can come together as a “buyers’ cartel” to connect with global suppliers, Bloomberg said.
EOA’s Main Takeaway:
The irony here is that “transparency” nullifies the impact of the cartel. Add to that the fact that companies must abide by EU laws, and here the benefit of the cartel disappears. The advantage in all this is that a large buyer may get a discount, and which large buyers usually obtain, and that’s it.
Everything will work fine, regardless of the benefits, until a crisis hits. At this point, every country is on its own.
7- KUNA: KIPIC Inaugurates second phase of Al-Zour Refinery
The launch of the second phase of Al-Zour refinery (615,000 b/d) was announced on Tuesday. This will result in an increasing refining capacity from 205,000 b/d to 410,000 b/d.
EOA’s Main Takeaway:
The war in Ukraine has created a new market mechanism where refiners with spare capacity can influence the market more than OPEC+. The timing of the Al-Zour refinery, despite all the delays, has been perfect. However, the expansion means less crude will be available to the market, and more oil products instead.
8- FINANCIAL TIMES: UK’s National Grid orders all emergency coal plants online
The Financial Times wrote that the UK’s National Grid Electricity System Operator “has ordered emergency winter coal units to come online as the country faces potentially its tightest supplies of this winter.” The newspaper said that expected demand has been boosted by a brief period of cold weather at a time when imports from France have been reduced due to strikes at power stations over there.
EOA’s Main Takeaway:
Coal remains King! The most important point here, and which we highlighted in our previous reports, is that the change in the behavior of oil companies, especially BP and Shell, and the backpedaling on earlier announcements regarding green energy while refocusing on oil and gas, need to be read as part of the overall shift in Europe’s energy policies.
9- REUTERS: EU rewrites climate diplomacy deal to resolve nuclear sticking point
Reuters wrote that EU countries "intend to push for a global phasing out of fossil fuels among their climate diplomacy priorities this year, which the bloc hopes to approve this week after rewriting a contentious section on nuclear energy." On nuclear energy, the report said that the disagreement is on whether EU diplomacy "should promote low-carbon hydrogen."
EOA’s Main Takeaway:
A key lesson from 2022 that is clear and unambiguous is that what’s on paper remains on paper. When climate change policies contradict national and economic security, climate change policies are sacrificed in this case, and climate agreements become meaningless. What the EU has yet to realize is that China, India, and several African countries are watching, and they will ignore international climate change agreements as well. This makes us bullish on oil, natural gas and coal.
REUTERS: Exxon says it is reevaluating Europe strategy after windfall taxes
Due to new windfall profits taxes in Europe, Exxon Mobil Corp is reviewing its role there as it focuses more on investments in the US, Reuters cited Chief Executive Darren Woods as saying.
EOA’s Main Takeaway:
Say goodbye to energy security. We have already seen the impact of the windfall profits taxes in the UK: Companies have been reducing their spending and redirecting their investments elsewhere. Over time, taxes will decrease, but when this happens the number of jobs would have declined, as well as the number of students specializing in the oil and gas industry.