The European Union is all set to impose the harshest sanctions against Russia targeting oil and insurance, with exemptions to Hungary. The EU plans to ban imports of Russian oil and block insurers from covering Russia’s cargoes of crude. The ban on insurers will cover tankers carrying Russian oil anywhere in the world. These sanctions could undercut Russia’s efforts to sell its oil in Asia. European companies insure most of the world’s oil trade.
But skeptics wonder about the efficacy of these sanctions. Shippers and refiners have been very skilled at hiding origin of Russian oil. According to a Wall Street Journal report, in the wake of the invasion of Ukraine and sanctions from the U.S. and the European Union, traders are working to obscure the origins of Russian oil to keep it flowing. The oil is being concealed in blended refined products such as gasoline, diesel and chemicals.
Oil is also being transferred between ships at sea, a page out of the playbook used to buy and sell sanctioned Iranian and Venezuelan oil. The transfers are happening in the Mediterranean, off the coast of West Africa and the Black Sea, with oil then heading toward China, India and Western Europe, according to shipping companies.
Overall, Russian oil exports rebounded in April, after dropping in March as the first Western sanctions took effect, the International Energy Agency said. Russia’s oil exports rose by 620,000 barrels to 8.1 million barrels a day, close to its prewar levels, with the biggest increase going to India.
India has emerged as a key hub for Russian oil flows. The country’s imports have skyrocketed to 800,000 barrels a day since the war began, compared with 30,000 barrels a day previously, according to commodity-markets data company Kpler. A refinery owned by Indian energy giant Reliance Industries Ltd. bought seven times more Russian crude in May, compared with prewar levels, making up a fifth of its total intake, according to Kpler.
Reliance chartered an oil tanker to carry a cargo of alkylate, a gasoline component, departing from the nearby Sikka port on April 21 without a planned destination. Three days later, it updated its records with a U.S. port and sailed over, discharging its cargo on May 22 in New York.
“What likely happened was Reliance took on a discounted cargo of Russian crude, refined it and then sold the product on the short-term market where it found a U.S. buyer,” said Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air. The organization is tracking Russian fossil fuel exports and their role in funding the Ukraine war. “It does look like there’s a trade where Russian crude is refined in India and then some of it is sold to the U.S.”
To avoid large insurance costs, the ships turn off their GPS systems to go dark, then transfer oil to large megatankers such as the Lauren II, a giant Chinese crude carrier that can hold about 2 million barrels of oil.
As long as India and China are willing to bypass sanctions, the oil will get through. However, these added costs impact prices globally.
More ships are used to haul oil from Russia to India and China instead of Russia to the EU. In turn, the EU gets oil from Saudi Arabia instead of Russia.
Sanctions drive up the price so much that Russia is getting more money even though Russia has to discount its price significantly to find takers.
It’s worth noting that Saudi Arabia and the UAE themselves have repeatedly signaled that they had no plans to boost crude oil production beyond their production quotas under the OPEC+ agreement.