Column: Ukraine crisis will disrupt crude, coal and LNG flows even without sanctions: Russell

LAUNCESTON, Australia, Feb 25 (Reuters) – Russia’s invasion of Ukraine will disrupt the global movement of energy commodities, even if Western powers do not impose sanctions on Russian exports.

So far, none of the retaliatory measures against Moscow have targeted exports of crude oil, coal or natural gas, the latter by pipeline or by ships in the form of liquefied natural gas (LNG).

This is perhaps a tacit acknowledgment of Russia’s importance for the global supply of these raw materials, and particularly with regard to natural gas, with Russia supplying around 40% of the annual demand for Europe.

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But even if the United States, Europe and other allies like Japan and South Korea decide not to impose measures against Russian energy exports, it is likely that private companies will. for them.

The risks of doing business with Russia will become too much for many companies to bear, even without sanctions.

A clear illustration of this was reported that a coal bulk carrier chartered by commodities trading firm Cargill was hit by a shell in the Black Sea in Ukrainian waters on Thursday, just hours after Russia launched a widespread attack on its neighbour. Read more

Very few trading, shipping and insurance companies will be willing to take the risk of dealing with shipments from Russia, fearing either physical attack, payment problems due to financial sanctions, the risk of non-delivery if new measures are being taken against Russia, and even backlash from the public and investors for continuing to do business with a country now widely seen as waging an illegal war.

So how does this play out in the real world of commodity trading?

The first point is that this is likely to be a long and tedious process that will take months or even years.

Russian energy commodity exports are likely to remain unchanged for some time, but then begin to change.

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Russia supplied about 2.66 million barrels per day (bpd) of crude via the sea market to Europe in February, according to data from Refinitiv Oil Research, and it regularly ships more than 2 million bpd per month.

European refiners will now be reluctant to buy Russian crude, and it is likely that the main grade from the Urals will have to be offered at deeply discounted prices to find buyers.

Urals spreads have already hit an all-time low, falling to a discount of $11 a barrel on Thursday as buyer interest in northwestern Europe evaporated.

Who will be ready to buy Ural crude? The obvious answer is China, which has so far indicated that it will not join in any sanctions against Russia.

But for the Urals to reach China, it would have to undertake a long sea voyage through the Suez Canal or around the Cape of Good Hope, which would increase transportation costs.

This means that Chinese refiners are likely to demand even deeper discounts to take shipments from the Urals, and even then they are unlikely to take even close to the volumes that Russia is likely to lose. in Europe.

Other countries may be tempted by cheap Russian oil, but are likely to come under pressure from Western nations, especially the United States.

Russia also supplies crude oil to Asia, with ESPO grade being sought after, particularly by independent Chinese refiners.

Russia exported 1.29 million bpd of maritime crude to Asia in February, according to Refinitiv, with the bulk, about 718,000 bpd, going to China.

But that still leaves about 572,000 bpd of Russian crude that went to other Asian buyers, including some 126,000 bpd to Japan and 355,000 bpd to South Korea.

These flows are threatened in the coming months, which means that Russia will seek new markets or try to put more volumes in China.

Conversely, European refiners, as well as those in Japan and South Korea, will be looking to boost imports from alternative suppliers, and given the current tight nature of the global crude oil market, this is going to be tricky. .

It is likely that pressure will intensify on members of the Organization of the Petroleum Exporting Countries to rapidly increase production and abandon the current production agreement they have as part of the enlarged OPEC + group, which includes Russia, especially if global benchmark Brent futures hold above the $100-a-barrel level breached after Thursday’s invasion of Ukraine.

COAL, LNG

Russia also supplies coal to Europe, with Refinitiv pegging February seagoing volumes at 3.27 million tonnes.

Again, this trade is likely to become toxic to European utilities, meaning they will scramble to buy cargo from the US, Colombia and South Africa.

That should tighten global marine coal markets, especially if Japan, which bought 1.18 million tonnes of Russian coal in January, seeks supplies from other suppliers.

Benchmark Australian thermal coal from the Port of Newcastle was valued by globalCOAL at $244.29 a tonne on Thursday, up 1.6% from the previous day and well above last week’s $226.39 .

Natural gas is where things will get tough for Europe, given its dependence on Russia and the lack of readily available alternatives.

Europe may seek to buy as much LNG as possible, steering cargo away from Asia’s biggest importing region, but this will be expensive, as the jump in futures based on the Asian JKM price shows. which jumped 28% on Thursday. to a two-month high of $37.01 per million British thermal units.

Over time, Europe may buy more LNG from the United States and Qatar, which are currently building substantial new capacity, and they may seek to maximize the continent’s own production, primarily from the North Sea.

Europe can also invest heavily in renewable energy generation and battery storage, but in the short to medium term the continent is still dependent on Russia, given that President Vladimir Putin has leverage that he can act if sanctions and voluntary commodity trade cuts begin to cause Russia’s real pain.

INTERACTIVE CHART – Russia’s top oil export destinations in 2020 https://tmsnrt.rs/3IhVGpW

The opinions expressed here are those of the author, columnist for Reuters.

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Editing by Richard Pullin

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