A surge in demand from Asia for discounted Russian oil is making up for the sharply lower number of barrels being sold to Europe, dulling the effects of the West’s efforts to punish Moscow over its invasion of Ukraine and keeping revenue flowing to the Kremlin.
Most of the additional oil has gone to two countries: China and India. China’s imports of Russian oil rose 28% in May from the previous month, hitting a record high and helping Russia overtake Saudi Arabia as China’s largest supplier. And most of the increase went to India, which has gone from taking in almost no Russian oil to bringing in more than 760,000 barrels a day, according to shipping data analyzed by Kpler, a market research firm.
Although South Korea and Japan have cut back on Russian oil, those volumes are a fraction of what is being bought by China and India.
“Asia has saved Russian crude production,” said Viktor Katona, an analyst at Kpler. “Russia, instead of falling further, is almost close to its pre-pandemic levels.”
Russian oil is being sold at a steep discount because of the risks associated with sanctions imposed to punish Russia for its invasion of Ukraine. Even so, soaring energy prices have led to an uptick in oil revenue for Russia, which took in $1.7 billion more last month than it did in April, according to the International Energy Agency.
Although it remains to be seen how much Asia will continue buying the oil as Europe weans itself off Russian energy, the shift has allowed Moscow to maintain its production levels and defy analysts’ expectations that its output would plunge. And it has offered another indication of the support Russia enjoys from China, whose top leader, Xi Jinping, has offered to deepen cooperation with Moscow despite its invasion of Ukraine.
Russian crude sales dropped by 554,000 barrels a day to Europe from March to May, while Asian refiners increased their take by 503,000 barrels a day — nearly a replacement of one for one. Of those, 165,000 barrels are going to China from eastern Russian ports instead of the Baltic and the Black Sea ports that traditionally supply Europe. Russian sales to India reached a record 841,000 barrels a day in May, eight times the average from last year.
J.P. Morgan commodities experts estimate that China can buy an additional 1 million barrels of Russian crude a day as China recovers from COVID-19 and attempts to add to its strategic crude stockpiles on the cheap. Russian Urals crude is selling for a $30 discount compared with Brent, the international benchmark.
The combination of discounted Russian crude and higher prices at the pump also means that Indian refiners are doubly profiting, according to analysts. Some of the oil products re-exported by India went in shipments bound for the United States, Britain, France and Italy, according to the Finland-based organization Center for Research on Energy and Clean Air.
There was the hope that threatened sanctions against those who insured Russian shipments would stick. But while financing shipping vessels has increased costs, the discounts are so steep that China, India and other Asian buyers are buying.
Once they refine oil into diesel, no one can distinguish whether the products that are sent to Europe and elsewhere come from Russian crude. JP Morgan estimates that Russia can find shipping capacity to transport about 3 million barrels a day of oil to Asia, and state-run Indian and Chinese insurers will take care of the insurance.
“Those molecules, a lot of them are Russian,” Jeff Brown, president of FGE, an energy consulting firm, said of the refined oil that is being re-exported to the West. “That’s the core tension — they want to punish Russia, but they don’t want oil prices to go up.”