The global oil market was thrown into chaos after the invasion of Russia into Ukraine. This is with top buyers of Russian oil struggling to secure guarantees at Western banks or find ships to take crude from one of the world’s largest producers.
Three major buyers of Russian oil have been unable to open letters of credit from Western banks to cover purchases. This has cited the market uncertainty after the Russian invasion. Russia produces every tenth barrel in the world and oil prices jumped to above $105 per barrel. This is their highest since 2014. In the Black Sea, a Turkish-owned ship was hit by a bomb off the coast of Ukraine’s port city Odessa. And, that is prompting shipping companies to avoid calling at Black Sea ports.
The ship brokers and a senior Greek maritime ministry official said that the Greece urgently recommended all Greek ships immediately leave Ukraine and Russia territorial waters in the Black Sea. The oil market is already suffering from tight supplies due to years of low investment. And, amid booming demand as pandemic-linked restrictions ease around the world. Also, one source said that the Banks are not willing to open LCs for the moment so it is a bit of a standoff. Letters of credit from the bank of the buyer are standard practice in commodities trading. Top Russian oil buyers include Western oil majors such as BP and Shell, ENI, TotalEnergies, Equinor, Chevron and Exxon Mobil and trading houses such as Vitol, Glencore, Trafigura, Gunvor and Mercuria.
The West has pledged tough sanctions against Russia for the invasion. And this could potentially include cutting Russia off the SWIFT financial transaction system. But it would also have severe implications for the western economy. Because, it could disrupt exports of much-needed commodities amid galloping inflation. Russia exports around 4-5 million barrels per day (bpd) of crude and another 2-3 million bpd of refined products. China, the EU, South Korea, India and Japan are its main buyers.
Some traders spoke of the Iranian syndrome. A senior executive at a major European bank said, that they look at all deals case by case. But no hard stop. By this they are indicating a slowdown for Russian oil and commodity deals. Most top Western banks are active in financing oil and commodities and issue LCs. It was unclear to what extent the lack of letters of credit could disrupt Russian exports. The shipping rates to load at Russian ports and discharge in northern Europe have tripled in one day to World Scale 300. A ship broker stated that some 90% of ship owners are telling them that they will sit and assess the situation. Also, they have had one owner saying they will not work with Russian counterparts.
One tanker, the Delta Sailor, was fixed at World Scale 300 to load at Russian Baltic oil ports on Feb. 28 to March 1 to sail to northwest Europe. The Minerva Helen was similarly booked at short notice to load from the same area at over World Scale 200.