Russian Oil Prices Surge, Putting Sanctions to Test

"U.S.-led sanctions designed to throttle Moscow's fossil-fuel income face a new challenge: A big jump in the price Russia gets for its oil.

Booming demand in India and China has pushed the price of Urals crude, Russia's main grade of oil, up to about $55 a barrel from a daily low of $35 in January, according to commodities-data firm Argus Media. The rally contrasts with a retreat in broader oil markets driven by weakening demand in the U.S. and Europe as economies there slow.

Prices could soon run into the $60-a-barrel limit the U.S. and allies placed on most Russian crude exports, putting pressure on the West's ability to keep Russian oil on the market while pinching the Kremlin's revenue. Russian crude still trades at a substantial discount to benchmark oil prices, as it has since the events in Ukraine, but the gap has narrowed.

Some oil traders are starting to question whether they should keep carrying Urals given the risk of getting caught up by sanctions. 

Others are finding alternative ways to carry Russian oil at higher prices.

David Fyfe, chief economist at Argus, said it is uncertain how both the U.S. government and oil markets would react to the price of Urals passing $60. A retreat by Western shippers from the market, spurred by the fear of sanctions, could dent exports and boost global prices, he said.

U.S. and European officials say they have stepped up enforcement efforts to ensure compliance with the cap -- a move that U.S. officials say isn't related to rising prices. Under the sanctions, the U.S. and allies banned firms in their jurisdictions from facilitating exports unless oil is sold below $60 a barrel.

Since its launch in December, Western officials say their plan has accomplished its twin goals of stemming the flow of oil money to Moscow, while not disrupting global energy markets. Oil-and-gas tax revenue, the biggest driver of Russia's budget, fell 45% in the first quarter compared with last year.

Some traders say the sanctions have pushed millions of barrels of oil each day into a shadow market where money is hard to trace.

As Urals prices approached the cap in recent weeks, traders subject to the sanctions grew nervous about handling cargoes. Traders serve as middlemen between Russian producers and end users, such as oil refineries.

Shipping is a bigger potential pinch point. Though a large amount of Russian oil travels on tankers outside the mainstream shipping industry and the reach of the Western sanctions, Greek companies move huge volumes of Urals.

Five Greek groups have shuttled nearly 15% of seaborne crude and fuel collectively since the sanctions kicked in, according to analysis of shipping data by Global Witness, an anticorruption organization that has campaigned for tougher sanctions on Russia. The departure of many Western operators from the Russian oil market left a "large gap which was then immediately filled by Greek shippers," said Christopher Lambin, a Global Witness senior investigator.

U.S. officials said they don't see widespread movement toward alternative maritime services as the price of Urals rises. Russian traders and others outside the Western system lack the boats, financing and insurance to move significantly more oil, they said.

Many traders and analysts expect oil to keep flowing nonetheless. At every stage of the conflict, Moscow has succeeded in finding new buyers, traders, shippers, insurers and financiers. It is on track to export 101 million barrels of its crude by sea this month, according to cargo-tracking firm Kpler, just below January 2022 levels.

In a sign that the market is proving flexible again, one big new shipping company has ditched Western insurance to move oil above the cap. Gatik Ship Management, based in Mumbai, assembled a fleet last year and began to move huge volumes of Russian crude to India. For a time, it was covered against accidents by the American Club of insurers. Gatik recently lost that cover, the American Club's database shows. The American Club learned that Gatik planned to move oil above the cap, said a person familiar with the change. U.S. insurers are barred from covering Russian oil shipments unless it is sold below the cap.

A Gatik spokesperson didn't respond to requests to comment. Lloyd's List earlier reported Gatik's lost insurance.

"Russia has absolutely no problem in placing all of its volumes in the market at terms that Russia considers reasonable," said Sergey Vakulenko, a former Russian energy executive and scholar at the Carnegie Russia Eurasia Center. "They just find another way."

The U.S. Treasury said last week it received reports of possible evasion through Russia's smaller but still significant oil-export terminals that feed ships carrying crude across the Pacific Ocean, warning Americans that they could inadvertently be facilitating trades above the cap.

A grade of Russian crude called Espo, exported from the Pacific port of Kozmino, fetched $73 a barrel on average in the first quarter, showed an analysis published Wednesday by the Kyiv School of Economics. Some of the Espo oil is carried by so-called shadow fleet ships not subject to the cap rules because they don't use Western insurance or finance." [1]

1. World News: Russian Oil Prices Surge, Putting Sanctions to Test
Wallace, Joe; Duehren, Andrew.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 27 Apr 2023: A.8.