Blood Oil: The souring of Russian crude
Deep discounts on Russian-sourced oil reflecting fallout from Ukraine war sanctions
During times of triple-digit oil prices it’s not often you come across a good deal. When it comes to those in the market for Russian crude, you can get exactly that. The question remains: is it legal?
The international shunning of anything Russian is reaching a fever pitch. The blowback from Russian President Vladimir Putin’s invasion into Ukraine last week is understandably severe. FIFA banned the nation from competing in World Cup qualifying matches.1 Corporations are pulling non-Russian staff from the country. Exxon Mobil, BP, Shell, and others, are halting operations and suspending any further investment.2 Hollywood denied the release of new blockbusters.3 Customers of sanctioned Russian banks may find payment services like Apple Pay and Google Pay completely unusable altogether.4
The outpouring of financial condemnation is designed as a pincer movement surrounding Putin. By cutting off Russia from (almost) anything* involving Western sports leagues, entertainment, finance, or business ties, the goal is to inflict as much pain onto the Russia economy as possible. The hope: turn everyday Russians and the oligarch class against the political leadership.
Severing corporate relationships and investment will prove very detrimental to the Russian (and global) economy long term. *The asterisk above, of course, remains Russian fossil fuels. Europe’s insatiable appetite for imported energy is the hang up some countries like Germany have given their reliance on the former Soviet motherland. Thus far, sanctions are deliberately excluding this key area—or are they?
Oil prices as a result of the war have skyrocketed past $110/barrel. As pointed out by many, the political sanctions seem not-so-serious as the commodity spikes go to fuel Russian coffers as exports continue to flow.
There seems to be difficulty moving this product on the open markets, however. Trafigura Group is one of the largest metals/energy trading firms in the world. On March 1, a cargo load of Russian crude traded at a -$18.60 discount to the Brent Index with no buyers.5 The best deal in town has zero interest/no bid. An ironic twist in an era of shortages and supply chain disruptions with the prevailing problem of high interest/no supply, and therefore, no price for a product that doesn’t exist.
“Almost 70% of Russian crude oil exports do not have a buyer according to UK-based research consultancy, Energy Aspects.”
- BBC News
So are speculators turning away from a lucrative multi-million dollar arbitrage opportunity on principle? Not exactly. As it turns out, the discounted Russian oil is such not out of any altruistic intentions. The reality is no one knows precisely whether this product is legitimate tradable commodity or is tainted contraband due the recent EU and US sanctions. Running afoul of these prohibitions is not a chance any seem willing to take given no buyers have bit on the discounted haul.
As it stands, the crude could be worth around market price with a hefty near-$20/barrel discount…or, zero plus criminal penalties. I suppose you’d be out your original cost basis of around ~$90/barrel as well.
The risk/reward clearly isn’t there at the moment. You can bet lawyers are on retainer thumbing through the paperwork. Whoever is first to certify this as being a legitimate transaction, if it is at all, stands to earn a massive payday. For the time being, the market is dangling a carrot for anyone to bite. It may turnout to be a poison apple, and if things continue to fall apart, the discount could turn the price of this haul negative a la April 2020. Remember when oil dove to -$40/barrel because of COVID lockdowns? Holding unmarketable product tying up ocean freight becomes a liability you’ll be willing to pay to get rid of. For the time being, it’ll serve as another quirky tale caused by political upheaval.
Bushnell, Henry. February 28, 2022. Russia banned from World Cup, other major sports competitions amid war in Ukraine. Yahoo! Sports. https://sports.yahoo.com/russia-world-cup-fifa-ban-war-ukraine-165442530.html
Matthews, Christopher, et al. March 1, 2022. Exxon to Shut Down Oil Production in Russia After Ukraine Attack. The Wall Street Journal. https://www.wsj.com/articles/exxon-to-shut-down-oil-production-in-russia-after-ukraine-attack-11646180028#:~:text=The%20majority%20of%20Exxon's%20roughly,nation%2C%E2%80%9D%20the%20company%20said.
Romano, Nick. March 1, 2022. Hollywood studios are pulling movie releases from Russia. Entertainment Weekly. https://ew.com/movies/hollywood-studios-pull-russia-movie-releases/
Wituschek, Joe. February 28, 2022. Apple confirms that Apple Pay is no longer supported for Russian bank. iMore. https://www.imore.com/apple-confirms-apple-pay-no-longer-supported-russian-bank
Martin, Josh. March 2, 2022. Oil price rises again as buyers shun Russian crude. BBC News. https://www.bbc.com/news/business-60584798