Russia’s ESPO Blend oil slips to discount on China’s weak demand

Export prices for Russia’s ESPO Blend crude have slipped to a discount to benchmark Brent in Chinese ports as demand from top buyer China eases and freight costs have jumped after the U.S. sanctioned two shipowners, three market sources told Reuters.

Lower prices for the crude grade that accounts for the bulk of China’s oil purchases from Russia and higher shipping costs are squeezing profits for Russian producers that are delivering oil to its customers despite Western sanctions aimed at curbing Moscow’s ability to finance the conflict in Ukraine.

ESPO Blend loading from the Far Eastern port of Kozmino in December is trading at discounts of $0.50 to $1 per barrel to ICE Brent on a delivered ex-ship (DES) basis at Chinese ports, the sources said.

That is down from premiums of about $1 per barrel to ICE Brent for cargoes loading in November, traders said.

China’s oil refinery utilisation rates are easing from record third-quarter levels as thinning margins and a shortage of export quotas discourage plants from raising output for the rest of 2023, according to traders and industry consultancies.

Chinese refiners buy most ESPO Blend cargoes loading from Kozmino, while Indian refiners account for four to five cargoes per month on average, traders said.

Freight rates for December ESPO Blend cargoes have jumped to nearly $2 million for a voyage between Kozmino and Chinese ports after Washington stepped up scrutiny of ships handling cargoes that violate the G7 price cap policy, the sources said.

The freight rate was about $1.6 million in September, Simpson Spence Young data on LSEG Eikon showed.

Tanker freight rates from Russia’s Baltic ports to India also jumped some 50% last month, shortly after the U.S. sanctioned the shipowners.

ESPO Blend exports are expected to rise in November and December to nearly 1 million barrels per day (bpd) from around 900,000 bpd in September-October, traders said.

“ESPO did extremely well this autumn. Now prices are lower, but it remains one of most profitable export routes for Russian companies, while fresh quotas may bring Chinese demand back,” one of the sources said.

However, refiners and oil traders in China told Reuters that they do not expect Beijing to issue additional quotas for 2023, which would hold off demand for ESPO at independent refineries in the near term.

“We now expect the government will only allocate the new import allotment in December for 2024. Until then, we have to be smart on choosing feedstocks,” said a China-based source.
Source: Reuters (Reporting by Reuters, Muyu Xu and Chen Aizhu in Singapore; Editing by Florence Tan and Mark Potter)