The immediate supply shock caused by Russia’s invasion of Ukraine was felt in power, petrol and supermarket prices across Europe — and now, as the war enters its fifth month, sanctions and financing restrictions may trigger supply-side changes that could affect natural gas, crude, diesel and grains for years to come.
Russia’s commodity exports fell as a result of Western sanctions, purchasers self-sanctioning and security issues on the supply routes, and Europe’s imports are set to decline further as phased sanctions come fully into effect, mostly by early 2023.
Russian countersanctions include a rule stipulating that European consumers should pay for Russian gas via a ruble-payment mechanism. Gazprom has cut off several countries that have refused to comply.
As the conflict continues, the likelihood grows of new measures targeting other areas of commodity trading, and Russia’s response could include further attempts to change payment terms.
Sanctions’ effect on Urals crude
Sanctions will bring a near total ban on EU imports of Russian oil in early 2023, with member states prohibiting most seaborne Russian crude in six months, and Russian oil products embargoed after a nine-month transition period. The EU and UK also announced a joint plan to ban the insurance and financing of vessels carrying Russian oil to third countries, after a wind-down period of six months.
Despite intense international pressure, Urals exports reached a three-year high in May, while June exports to Europe are expected to rise for the first time since Russia invaded Ukraine, according to shipping data from Kpler. More Russian crude has been made available to export as a result of significantly reduced Russian refinery throughput.
Urals crude is trading at a record discount to Dated Brent for Europe-bound cargoes, according to the latest Platts assessments from S&P Global Commodity Insights.
Outside Europe, Urals increasingly finds homes in India and independent Chinese refineries. According to traders, 50% of Urals cargoes now trade to Asian end-users.
One Urals trader said that the market had only priced in 60% of the sanctions, and as the EU’s deadline approaches, the Urals discount will need to widen further to dislocate more natural flows from the Middle East to Far East refineries.
Analysts say the increase in Urals export volumes is unsustainable and that insurance bans will limit how much Asian buyers can take.
“You will know when sanctions are working when the markets go crazy,” one trader said.
Replacing Russian diesel
Europe has a structural deficit in diesel, and it imports more than 3 million mt of the product each month, of which Russia had been providing more than 2 million mt until its war with Ukraine.
“We expect the diesel market to be tight next year — how the European market will be covered is the big question,” a trader said.
“I don’t see how Europe will be able to replace all the Russian flows of diesel,” a second trader said.
“Maybe some Russian [diesel] will go East and we will see more product from East coming to Europe,” a third trader said.
German generators turn to coal
The war has also triggered serious concerns on the European gas market given Russia’s importance to supply. Russian gas transit via Ukraine to the EU has continued despite the war, though deliveries are currently low, with transit halted via the Sokhranivka entry point after Kyiv declared force majeure.
The fear of losing Russian gas has prompted Germany to turn to more coal for power generation in a bid to save gas for storage injection.
Jitters over lost grain, sunflower oil exports
For the grains market, the primary impact of Russia’s invasion has been through the closure of deepsea ports in Ukraine, which were mined as a defensive measure and are now blockaded by Russian warships.
Before the war, Ukraine’s wheat was already in the ground for the 2022-23 marketing year, and the previous year’s wheat crop had already been exported.
The war has destroyed some facilities, as well as impeding field work, fertilizer imports and the planting of corn. Before the war, the US Department of Agriculture had said Ukraine would provide 12% and 16% of the world’s exported wheat and corn, respectively. Growers in Ukraine have long been warning of a more serious phase. This will play out in the remaining half of 2022, when the country’s silos are full and farmers lack cash and the seed necessary for planting the new crop.
“I am not sure why [Ukraine’s] farmers planted as much this year … part of it might remain unharvested in the fields, but they’ll think twice before planting again,” one trader said.
Ukraine also represents 50% of the world’s sunflower oil exports, and market sources reported that crushers in the country are scrambling to offload old stocks of sunflower oil at discounted levels, even at negative margins, to recover revenue and free up storage tanks.
Return of Russian semi-finished steel
After the war’s outbreak, Russian steel producers overall reduced their global steel and raw material exports, particularly to the EU and the US amid sanctions. This period of regulatory uncertainty allowed for a record price spike in several regional and product markets — due to supply tightness and diverted demand, from which Turkey was the main beneficiary.
Russian steel exports returned in late March, albeit to a sharply reduced pool of buyers, including Turkey as well as some Asian markets, sending EMEA ferrous complex prices below prewar levels.
In Europe, the loss of Russian and Ukraine-origin slabs forced the majority of rerolling mills to find new sources of upstream material at higher prices and with longer lead times, creating a void in European steel plate supply chains. Prices remain above prewar levels, despite coming down from a peak of Eur1,810/mt EXW Italy, and this has seen the market continue to suffer a dramatic slump in demand.
To match reduced demand and sustain mill profitability, steel market sources report a need for substantial cuts to capacity utilization — as seen in the idling of two of ArcelorMittal’s blast furnaces, the market leader in European steelmaking.
Source: Platts
