World is shifting oil trade routes

(Rosneft, Public domain)

Russia, the world’s biggest oil producer, has been gradually redirecting its oil exports from Europe to the increasingly more promising Chinese market, as China became the largest oil importer in the world.

During the first five months of 2018, Russia has shipped an average of 19 per cent less crude to Europe through its main ports on the Baltic and Black Seas compared with a year earlier. At the same time, oil flows to China totaled 750 barrels per day in Q1’18. Meanwhile, the missing Russian oil has been gradually replaced by surging the US oil exports to Europe. 

The new export strategy favored by Russia’s oil exporters could be attributed to several factors. According to the director of Veta expert group, Dmitriy Zharskiy, the prices of oil in China are higher than in European markets. Furthermore, Russia’s oil exporters were forced to make a choice between Europe and China after the latest OPEC deal was reached. “Under the terms of the agreement, Russia is allowed to increase the volume of its oil exports to one market only,” Zharskiy said to

China is responsible for around one fourth of global oil demand. In the last three years, this demand has been growing by an average of 5 per cent. In comparison, the rest of the world’s demand has been growing by only around 1,7 per cent. According to the International Energy Agency, China and India will be the key world’s oil consumers, driving the global demand for the “black gold” at least until the 2035.

Having consumed 610 million tons of oil last year, 420 of which were imported, China became the largest oil importer in the world, leaving behind the United States at the second place. Those figures translate into daily purchases of 8,43 million barrels per day.

According to experts, Russia’s growing oil exports to China are a result of long-term deals signed between the Russian oil giant Rosneft and China, as well as recent efforts to improve the oil infrastructure connecting the two countries. For example, the Eastern Siberia-Pacific Ocean pipeline, a pipeline system for exporting Russian crude oil to the Asia-Pacific markets, was built by Transneft in 2009. In 2013, Rosneft signed a deal with China National Petroleum Corporation for which the Russian oil company received USD20bn in advance payments.

And this is the reason why Russian companies like Rosneft prefer to do business with Chinese companies over their European counterparts. “The advantage of entering into long-term partnerships with the Chinese is that they are usually willing to provide certain benefits like long-term financing or some forms of capital investment,” says Dmitryi Marinchenko from Fitch Ratings Agency. It makes a lot of sense to do business with China, especially if you take into account the western sanctions that effectively disable some Russian companies from attracting European and American investors,” Marinchenko added.

In March 2018, the Main Customs Bureau of the People’s Republic of China revealed the latest import data according to which last year Russia became the largest oil supplier for the growing Asian economic powerhouse. Imports of oil from Russia increased by 23,4 per cent in January this year, and by another 18 per cent in February.

Growing US exports to Europe

Earlier this year, the head of the International Energy Agency Fatih Birol announced that the United States are becoming the undisputable leader of the world’s oil and gas industry. According to the agency, the United States could produce up to 10,4 million barrels of oil per day this year. If that prediction materializes, the new record will be set, surpassing the current record of 9,6 million barrels per day reached in 1970.

The United States and its oil and gas industry have benefited greatly from the introduction of innovative technologies — especially in the development of shale deposits — in the mid-2000s. After a number of American oil companies made the decision to explore the field of extraction of shale gas, the United States quickly became the largest producer of the commodity in the world. Moreover, during the last decade, the same kind of technologies have been used for the production of shale oil.

In 2015, after more than 40 years, the Congress of the United States abolished the ban on the export of American oil. Now those US companies that have been investing in innovative technologies used in oil extraction send increasingly more tankers to Europe. While the move by the U.S. Congress took some time to have any measurable impact on the US oil exports, the results of the decision are now clearly visible.

“European refiners started experimenting with the US crude oil last year,” Ehsan Ul-Haq, director of London-based consultancy Resource Economics told Reuters. “Now, they know more than enough to process it.”

Moreover, the recently concluded deal between Russia and the OPEC countries had the desired effect; the oil prices have been going up. At the same time, however, the growing prices, along with surging the US output, made it harder to sell Russian, Nigerian and other oil grades in Europe, according to Reuters.

In April 2018, the US supplies to Europe were set to reach an all-time high of roughly 550,000 barrels per day, according to the Thomson Reuters Eikon trade flows monitor. Moreover, in January-April, the US supplies jumped four-fold y/y to 6,8 million tons, or 68 large Aframax tankers, according to the same data.

Last year, Europe imported approximately 7 per cent of the US crude oil exports, but the proportion has already risen to roughly 12 per cent in 2018. Most of the US oil goes to Britain, Italy and the Netherlands.

Filip Brokeš is an analyst and a journalist specializing in international relations.

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