Russia is resorting to a number of murky practices to sell a lesser-known oil product to buyers wary of breaching sanctions, and to beat a financial cap set by the European Union and its allies.
(Bloomberg) — Russia is resorting to a number of murky practices to sell a lesser-known oil product to buyers wary of breaching sanctions, and to beat a financial cap set by the European Union and its allies.
Sellers of Russian naphtha — which is primarily used to make plastics and petrochemicals — are facing more hurdles getting the product to market since sanctions took effect in early February. That’s led to measures such as the fuel being labeled as gasoline or cargoes leaving ports without a destination, according to people familiar with the matter, and FGE and Kpler.
“There isn’t a clear, dedicated outlet for Russian naphtha now that its major buyers South Korea and Europe can’t take it directly,” said Armaan Ashraf, the global head of natural gas liquids at industry consultant FGE in Singapore. “Placing Russian naphtha may be more difficult than its crude.”
The lack of buyers that can soak up large volumes of naphtha has exacerbated the problem for Russia. China and India are taking more but both have ample domestic supplies, while South Korea — a key consumer pre-war — has shunned direct imports following sanctions. Brazil has been rare bright spot, however.
Russia shipped around 1.34 million tons of naphtha in March, a similar volume to the same period last year, according to data from Kpler, but questions remain whether the nation can maintain such flows over coming months.
Questionable Fuel
Russian gasoline has been observed flowing to storage tanks in the United Arab Emirates and West Africa, something that was previously rare, according to FGE. “These should be naphtha or potentially even off-spec gasoline with a lot of naphtha blended into them,” FGE’s Ashraf said.
There is a financial incentive to this measure. Sanctions set a $45-a-barrel cap for Russian naphtha, but market prices are currently above that level, while gasoline has a much higher limit of $100 a barrel.
Destination Unknown
More Russian naphtha loadings are signaling unknown destinations, which could indicate an attempt to obscure its origin as well as reflect the difficulty finding buyers, according to Ciaran Tyler, a senior natural gas liquids analyst at data intelligence firm Kpler in London.
Prior to sanctions, barely any cargoes were without a destination, but this has ballooned to almost a quarter of exports in March, Kpler figures show. Russian naphtha will face ongoing challenges when it comes to finding buyers, with most of its shipments seen clearing only by the next quarter, said Tyler. This will lead Russian refiners to cut operating rates in order to reduce exports, he added.
Discounts on Russian naphtha may also need to widen to justify the risk buyers are taking, according to FGE.
Regional Hubs
A key route for many of Moscow’s products has been a measure known as redocumenting, or the blending with non-Russian fuels at trading hubs such as Singapore and Fujairah in UAE. The practice gained pace after the war and has shown no signs of abating since sanctions were enacted.
Naphtha volumes loaded from Russia and signaling Singapore nearly quadrupled to around 164,000 tons in March, compared with a year earlier, according to Kpler. Cargoes signaling UAE jumped to 156,000 tons from zero.
However, some buyers in North Asia have signaled a reluctance to take the redocumented cargoes from the hubs following sanctions, which are typically being offered $10-to-$20 a ton cheaper than non-Russian fuel, according to people familiar with the matter.
There are signs sanctions are hitting Russia’s energy revenues. The country’s current-account surplus shrank last quarter by over $51 billion from a year earlier, according to preliminary central bank data.
–With assistance from Sarah Chen and Rakesh Sharma.
(Updates with Russia’s current account data in last paragraph.)
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