The price cap on Russian oil established by the European Union and the Group of 7 nations, which went into effect in tandem with the European Union’s prohibition on Russian oil imports by sea, appears to still be disregarded by China. Even if the prices paid by refiners may go over the price cap, Chinese refiners have been purchasing Russia’s East Siberian and Pacific (ESPO) mix at higher discounts than Brent for a number of months. Espoo crude’s price drop may entice new purchases from Chinese consumers in the anticipation that demand would increase as a result of Beijing relaxing its Corona virus pandemic control efforts over the past week.
Greater negotiating power
With effect from December 5, 2022, the European Union has set a price restriction on Russian oil at $60 per barrel in an effort to limit Moscow’s ability to raise money for its conflict in Ukraine while preserving supply to international markets. The biggest consumer of Russian oil, China, declined to accept a price ceiling. According to the merchants’ claims that were being watched by the specialist energy platform, they are doing their businesses as usual. According to Rystad Energy analysts Victor Kurilov and Jorge Leon, “certain buyers of Russian oil are expected to adopt a cautious approach in the first few weeks, decreasing purchases until the legal ramifications of such transaction become obvious.” The analysts also noted that China, India, and Turkey might be in a stronger negotiation position with a price cap in place.
Russian oil at greater discounts
Nearly all of China’s crude oil exports have delivery-based insurance from dealers who also arrange freight and insurance, protecting independent refiners from secondary fines brought on by price regulations. It was reported that at least one shipment of December-arriving Espoo oil was sold last week to a private refinery for a $6 per barrel discount to the price of Brent crude for the month of February, FOB the port of delivery. The price increase was $1.8 per barrel compared to three weeks ago. A $6 price cut equates to a $68 per barrel pricing at today’s Brent oil market price. Free-standing reprocessors “less than enthusiastic about the proposed price cap. They simply look at the numbers to determine if there is enough money being made off of the pricing being delivered.” The early January shipping transactions were made at a price per barrel $4 lower than March Brent, the lowest price for Espoo for the front month since July.
Iranian oil competes with Russia
Due to its proximity to Russia’s Far East and the higher yields of intermediate distillates, light, sweet crude is preferred by Chinese refiners. In Shandong, a province with a large number of independent refineries known as “teapots,” Espoo crude confronts greater competition, particularly from Iranian oil, which last week traded at a discount of about $10 to Brent crude. Vortexa, a tanker tracking company, reported that Chinese imports of Iranian oil disguised as supplies from exporters such as Malaysia and Oman may have reached a monthly high of roughly 4.7 million tons (34.5 million barrels) in November.
Traders are curious as to whether China and India would continue to purchase Russian oil and whether they will impose price controls or switch to non-EU suppliers. Because the trades are made against the average front-month Brent contract for February delivery, which cannot be booked until the end of December, the exact price of the products will not be known until a later date. According to Bloomberg, traders highlighted that Chinese refiners were not overly concerned if their products were subject to EU penalties or if they fit the conditions for a Russian oil price ceiling. According to them, this is because transactions are made on a delivery basis, leaving sellers responsible for shipping and insurance. It is also suspected that the supplies were paid for in Chinese yuan as opposed to U.S. dollars and financed by local banks and entities.