Global crude flows have shifted completely in a relatively short period of time.
Because of the resilience of oil demand Russia’s oil revenues are recovering, too.
West-African crude flows to Asia have dropped as Chinese buyers are increasingly buying Russian and Iranian crude.
Asian oil imports were due for a marked rebound this month after the end of the maintenance season. Chances are that a lot of the additional oil would be coming from Russia, which has become one of the largest suppliers of China and India.
In fact, Russian oil flows are growing despite claims from Moscow that it has reduced its total oil production. According to Bloomberg, Russian oil exports actually hit the highest since the start of 2022 last month.
This is happening in the context of the most severe sanction push by the collective West against the country. And it is the clearest evidence yet of just how essential oil is for the functioning of the global economy.
Before the invasion of Ukraine, Russia’s biggest oil clients were European countries. For China and India, it was a minor supplier. Since last year this has changed dramatically.
Now, China and India are the two biggest buyers of Russian crude. The two together took in as much as 80% of Russia’s total oil exports last month, according to the International Energy Agency. And the total, at 8.3 million barrels daily, was markedly higher than the annual average for both last year and the year before that.
What’s more, Europe, which placed an embargo on direct Russian oil and fuel imports, has been taking in more fuels made in Asia—notably India. In fact, it seems to be taking in a lot of these fuels if the EU’s top diplomat Josep Borrell had to call publicly for an end to this practice.
Indeed, India’s fuel exports to Europe over the past 12 months have jumped by over 70%, Reuters reported earlier this month. The report also noted that there is precious little the EU could do to change this without plunging the European economy into a deep recession brought on by fuel price inflation.
So, while until a year ago, Russian crude and fuels were going mostly to Europe directly, now almost all crude oil that Russia exports ends up in China and India. From there, processed into fuels, it goes to Europe. The routes have shifted. Oil demand has not.
It is because of the resilience of oil demand that Russia’s oil revenues are recovering, too. In a recent report, Finland-based energy think tank Centre for Research on Energy and Clean Air said Moscow’s oil export revenues have rebounded to the highest since last November over the past couple of months.
The authors noted that total budget revenues were down in April on an annual basis, but added that “Russia was able to export its main crude oil variety, for the first time, at prices that were systematically above the price cap level set by the U.S., EU and allies.”
There has been a lot of reporting about how China and India were benefiting from the discount at which Russian crude sells because of the sanctions. Most of that reporting has had an optimistic spin along the following lines: sanctions and the price cap are working because Russian oil is flowing, keeping global prices in check and bringing in lower revenues for the Kremlin.
What the optimistic spin omits is that Russian oil prices remain tied to global prices, and as global prices recover, so do the prices of Russian crude, as stated by the Centre for Research on Energy and Clean Air. In other words, global oil demand, and Asian oil demand specifically, is so inelastic that no amount of sanctions can sap it.
In further evidence of this inelasticity, Bloomberg reported recently that close to a third of China’s and India’s total oil imports came from three countries: Russia, Iran, and Venezuela. That was up from a modest 12% a year ago, the report noted.
Now that bargain oil imports are so much higher, oil from other sources such as West Africa and the United States have dropped by over 40% for West African oil and 35% for U.S. oil, the report, which cited data from Kpler.
According to the U.S. Treasury Secretary, the sanctions and the price cap are working as intended, reducing Russia’s oil revenues while keeping the international market for oil well supplied. Indeed, from that perspective, they are working as intended. Yet the shift these sanctions have prompted in global oil trade routes is much more important.
It has made Russia more dependent on just two oil-importing countries, analysts have noted. At the same time, it has made Europe more dependent on China and India for its fuels, even with U.S. fuel imports at a record earlier this year.
The two Asian economies are unanimously expected to be the biggest drivers of global oil demand growth over both the short and the long term, along with other Asian nations. This secures demand for Russian crude over the long term, likely to the chagrin of the EU.
Perhaps this would motivate an even faster push to lower oil consumption in the bloc—even if the success of the current push into electrification is not exactly living up to expectations. But whatever the EU decides to push, global oil demand is going nowhere.