Back in the USSR - The Combined Impact of Russia and China on Global Products Markets

As the world economy tries to dust itself off after COVID, increased demand for transportation fuels coupled with tight supplies has become a pain. The shortage escalated to crisis levels this spring and summer when, in response to Russia’s invasion of Ukraine, sanctions eliminated Russian exports of crude oil and intermediate feedstocks to the U.S. and severely reduced flows to Europe. While Russia has been able to find some alternate markets, its overall product exports are down significantly. Adding to these product-supply reductions are policy decisions by Putin’s allies in China to reduce their product exports to a trickle. Chinese exports had been an important part of regional supply in recent years, but authorities there have decided to decrease the number and size of export quotas issued, leaving many refineries in China operating at rates well below their capabilities. In today’s RBN blog, we take a closer look at how developments in Russia and China have played a major role in the current global shortage of refined products. 

In recent blogs we have discussed a number of factors that have led to the ongoing global tightness in refined products supply: U.S. refinery shutdowns, refinery closures elsewhere in the world, and IMO 2020 impacts. And as we said at the outset, developments in Russia and China –– the U.S. and Europe's primary geopolitical opponents — are only adding to these pressures. Russia has long been a significant exporter of finished refined products (mostly diesel) and intermediates (vacuum gasoil, naphtha, and resid/fuel oil). While Europe has been the primary destination for most of the finished products and also an important consumer of intermediates, Russian VGO and resid had grown to be an important source of feedstock for a number of U.S. refineries as well.

If you weren’t aware of Europe’s dependency on Russia for its energy needs prior to March of this year, you probably are now. We’ve previously discussed the impact of the loss of Russian natural gas (see Everything Has Changed). As far as crude oil goes, in 2018, Russia shipped around 1 MMb/d directly to Europe (excluding the Commonwealth of Independent States, or CIS, which includes eight countries that, with Russia, used to be part of the USSR) via the Druzhba pipeline before flows were reduced in 2019 due to a contamination issue and in 2020 and 2021 due to COVID. Russia expected Druzhba pipeline exports to again exceed 900 Mb/d this year, but actual exports will undoubtedly be much lower (likely in the neighborhood of an annual average of 400-600 Mb/d) due to the impact of sanctions as well as Western companies deciding to self-sanction. Russia used to export another 1.5 MMb/d to 2 MMb/d of crude oil via waterborne routes to Europe (again, excluding CIS countries) prior to the onset of the pandemic. These waterborne exports were easy to quickly reroute to other countries (mostly India and China), but rerouting the Druzhba flows was a bit more difficult.

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