Russian oil exports are down for now, but an increase beckons
In this research piece, Matt Smith explores the current trend of Russian crude exports, how weather has been impacting certain grades this month, and how we see flows changing in the months ahead.
With less than a third of the month to go, Russian grade crude exports are hovering around 2.9 mbd, the slowest pace since March.
A portion of recent export weakness can be explained away by a series of inclement weather events impacting various ports over the last few weeks. Storm warnings were in place the week before last at the Baltic ports of Ust-Luga and Primorsk, while loadings from Novorossiysk in the Black Sea have been hit in recent days due to storms. Exports have also been suspended from the eastern port of Kozmino earlier this week due to a typhoon.
Nonetheless, while weather related disruptions are transitory in nature, subdued crude production out of Russia in recent months appears to be a more persistent drag on crude exports. Russian oil and gas condensate production in August fell to 10.43 mbd according to the country’s Ministry of Energy data, edging lower from 10.46 mbd in July. Both months were below the production level seen back in April, despite Russia being granted the ability to boost production every month since January 2021 as part of the unwinding of the OPEC+ production cut deal.
Russian production is aggregated, and not broken out by oil and gas condensate. The country has had the ability to increase crude production by 115 kbd each month between April and July – but has seemingly failed to do so. There are some market reports suggesting that Russian production is rebounding this month, but we have yet to see that reflected in higher export volumes.
Urals production has led the decline through September, currently holding at just 1.25 mbd through the first three weeks of the month
In terms of grades, exports of Urals – Russia’s largest export grade by volume – have trended lower so far this month, marking a third straight months of declines. When Russian oil exports reached a 14-month high in June, Urals loadings were at 1.8 mbd, but have shrunk to 1.25 mbd so far this month. This was expected. The loading program for Urals was forecast to fall this month due to maintenance but is expected to increase in the coming months as demand rises.
This demand pull may be coming sooner than expected with the announcement of an extended period offline for some 200 kbd of US medium sour crude Mars due to Hurricane Ida. Urals is a ready substitute for Mars having already been a regular grade into Louisiana refineries such as P66’s Lake Charles in recent months.
More broadly, the United States has been a bright spot for Russian crude flows this year. Including all CPC Blend loadings from Novorossiysk, import flows into the US from Russia in May through July have climbed to multi-year highs, averaging around 300 kbd. Aside from CPC Blend - which is predominantly Kazakh and heads into the Atlantic Coast - Sokol has been the leading Russian grade into the US this year, pulled into the West Coast from storage in South Korea amid weak Asian demand and rebounding West Coast refining activity. It has been a similar story for Urals and ESPO – both have consistently headed to the US as opportunistic purchases amid demand weakness elsewhere.
ESPO crude exports are averaging just under 700 kbd so far this year, slightly higher than last year’s pace – but are down 54 kbd in September month-on-month, or 7%, as flows bound for China weaken for a fourth consecutive month. While exports may be hitting temporary speed bumps due to inclement weather at Kozmino, ESPO flows to China have been crimped in recent months because it is a popular grade with Chinese independent ‘teapot’ refiners. A lack of import quotas has forced teapot refiners to keep their appetite in check, while lower product export quotas are only adding to downward pressure on refining activity.
There may be good news on the horizon: Beijing is expected to issue a fourth batch of oil import quotas before the year-end. Accordingly, demand from Chinese independent refiners appears to be picking up, with spot premiums for ESPO climbing to their highest since January 2020 last week. A wider Brent-Dubai spread is also galvanizing ESPO, closing the window of competition on North Sea barrels.