Russia Pocketing More Money from Oil Sales Now than Before the War in Ukraine; Systemic Price Reversal Looms
Putin's revenue will be cut more by the demand destruction caused by rising living costs than by the strictest embargo imaginable on Russian oil shipments. Oil prices are expected to drop significantly in the second half of this year.
"The Russian energy sector has largely escaped the penalties, and as prices soar, it is making more money on exports than it did before the war. But eventually, energy output will also deteriorate, and the energy sector, too, will need spare parts and technological upgrades that only the West can properly offer. The Russian authorities have admitted that the country's oil output declined by 7.5 percent in March and may go down to levels not seen since 2003. Selling energy is likely to become a problem as well, especially if the European Union can wean itself from Russian oil and gas." — Vladislav Zubok, Foreign Affairs, July/August 2022
I begin this analysis with a confession. I am a gung-ho partisan of the Ukrainian cause. I was once in love with a supernaturally beautiful Ukrainian woman. And I despise the Kremlin for putting her and other beautiful Ukrainian gals in harm's way.
That said, I am not an enthusiast for sanctions and wholesale political manipulations and distortions of crucial energy markets. While no fan of Vladimir Putin, I fear that he was right in declaring that sanctions were "chaotic" and likely to harm Western economies as much or more than Russia.
So he declared at a recent meeting with the heads of Russian energy corporations. He went on to speak about how Europe was committing "economic suicide" and promised to remain ahead of the anti-Russian acts being taken by the West. Because of the growing multipolarity of the world, he is also of the opinion that the West is no longer in control of the decisions that are made about the economics of the entire world.
Even Putin's opponents in Russia believe that as long as the country's finances are in good form, the rest of the world, including some Western firms, dealers, and middlemen, would risk breaching sanctions in order to conduct business with Russia. He is not alone in this belief. They believe that as the global economy sags under the weight of the war and international shock over the invasion fades, Russia's relationship with the rest of the world will return to normal, just as it did after 2014.
The following is a list of countries and companies that continue to buy crude oil from Russia, compiled from data provided by the Indian news site NDTV Profit:
- Bulgaria: The Neftochim Burgas refinery, owned by Russia's Lukoil and the primary supplier of fuels in Bulgaria's domestic market, could use 100 percent non-Russian crude if necessary, up from 40 percent currently, according to a government official.
- China: China is Russia's second-largest oil importer after the European Union, and the International Energy Agency (IEA) predicts that seaborne shipments will increase. According to Reuters, Petro-Logistics, which monitors oil production and is a leading provider of cargo tracking data and trade flow intelligence, more Russian crude is being shipped to China.
- European Union (EU): The 27-nation bloc, which imports 40 percent of its gas and 27 percent of its crude oil from Russia, is divided on whether or not to reduce its consumption of Russian energy; however, a strategy to wean itself off of Russian fossil fuels over the long term is expected to be finalized by the end of May. Despite the impending implementation of fresh sanctions against Russia's oil majors Rosneft, Transneft, and Gazprom Neft, EU nations have stated that they will not cease purchasing oil from those companies.
- France: In 2021, the amount of crude oil imported from Russia accounted for 9.5 percent of the total. However, the French Association of the Petroleum Industry (Ufip) stated that alternative suppliers might be discovered, and it added that it is already shifting away from diesel that is produced in Russia.
- Germany: At Germany's most important refinery, the MiRO, around 14 percent of the crude oil that is processed comes from Russia. The Mineraloelraffinerie Oberrhein GmbH (MiRO) Refinery is a joint venture between Phillips 66, which holds a 18.75 percent interest, and Mineraloelraffinerie Oberrhein GmbH. The Druzhba pipeline supplies both the landlocked Leuna refinery, which is majority-owned by TotalEnergies, and the German PCK Schwedt refinery, which is owned by Rosneft Deutschland to the tune of a little more than 54 percent. Rosneft Deutschland is a subsidiary of Rosneft, which is headquartered in Russia.
- Greece: Hellenic Petroleum, the largest oil refiner in Greece, Russian crude will account for around 15 percent of the company's feed in the second half of 2021, but this percentage can be replaced. It has already made arrangements with Saudi Arabia to acquire extra supply.
- India: The state refiner of India, Hindustan Petroleum, has reportedly purchased 2 million barrels of Russian Urals for loading in May. According to sources in the trade industry, the Indian Oil Corporation, which is the largest refiner in India, recently purchased 3 million barrels of Urals for delivery in May.
- Italy: As of March 4, operations at Italy's largest refinery, ISAB, which is owned by Litasco SA of Switzerland and administered by Lukoil, continued as normal. It refines a number of crude oils.
- Hungary: the Hungarian oil group MOL, the Druzhba pipeline is still used to provide the company with fuel. Viktor Orban, the Prime Minister of Hungary, has often spoken out against restrictions on Russian oil and gas.
- Netherlands: The Dutch government and Rotterdam Port have not placed any restrictions on the importation of oil from Russia. Approximately thirty percent of the oil that passes through Rotterdam comes from Russia. Approximately 20 million metric tons per year worth of Russian oil products pass through the port.
- Poland: PKN Orlen, the largest refiner in Poland, has stated that it is purchasing crude oil from Russia for its refineries in Poland, Lithuania, and the Czech Republic. However, the company has stated that it is prepared for "any eventuality," including a complete stoppage of supply from Russia.
- Turkey: There are currently no intentions for Turkey to discontinue its purchases of crude oil and other related products from Russia. It takes issue with the sanctions imposed on Moscow. The most important refinery in Turkey is called Tupras.
- Brazil is the only original BRIC country that is not buying Russian oil. In fact, Brazil is cheerfully profiting from higher premia on sweet crude caused by the sanctions on Russian petroleum to sell its oil to US Gulf refineries.
- South Africa, a late arrival in the BRIC group is considering buying Russian crude at a discount. In order to combat the rapidly increasing cost of energy, South Africa has stated that it is considering buying oil from Russia.
"We should consider importing crude oil from Russia at a low price because it is not sanctioned," said South African Mineral Resources and Energy Minister Gwede Mantashe at a parliamentary debate, Reuters reported. A major factor motivating the South African interest in Russian crude is the fact that Fuel prices in South Africa were 29.2 percent higher in April than a year ago.
The purchase of energy goods from Russia does not violate sanctions imposed by either the United States or the European Union, despite the fact that such purchases render more stringent sanctions against Russia related to the conflict in Ukraine ineffective.
This is due to the fact that these trade restrictions do not prohibit purchasers outside of the jurisdictions of the United States and the European Union from purchasing Russian oil, which is presently offered at historic discounts in comparison to other grades.
US Energy Secretary Jennifer Granholm has raised the prospect of levying secondary sanctions against countries buying Russian oil. But the Biden administration is being somewhat careful about the impact of such restrictions on the market. Oil prices are trading at 13-year highs and contributing to red-hot consumer inflation.
The risk that a tighter prohibition on Russian oil sales would topple the world into recession is too obvious to be ignored. Indeed, evidence is already mounting that the global economy is slowing. Drs sounded a warning.
Dr. Copper Says the Economy is Turning Down
As you know, commodities investors tend believe that falling copper prices foretell an economic downturn. If you are among the investors who look to copper prices as a bellwether for the global economy, you have good reason to be worried.
Copper prices hit 16-month lows on Thursday, June 23 as traders dumped the metal. Copper has dropped more than 11% in two weeks.
Remember 2014. It was not only the year when Russia annexed Crimea from Ukraine.
Circumstances are developing for a repeat of the devastating systemic price reversal that hit oil beginning in June, 2014. After peaking at $107.95 a barrel on June 20, 2014, petroleum prices plunged to $44.08 a barrel by January 28, 2015, a drop of 59.2 percent in a little over 7 months.
Demand destruction caused by higher living costs will do more to reduce Putin's income than the tightest conceivable embargo on Russian oil sales. Check your portfolio to be sure you are ready for a plunge in oil prices in the second half of this year. The skyrocketing cost of energy is helping Russia enhance its oil export revenues, which increased by 11 percent in May.
Since 1984, I've been publishing an investing newsletter called Strategic Investment. For the past 37 years, my objective for the past 37 years has been to educate my subscribers on both domestic and international financial matters and to make as much money as I can for them.