Turkey May Soon Return as Big Buyer of Russian Oil
Published:
Fri, Dec 23, 2022
Turkey stepped up its purchases of Russian crude oil this year to take advantage of deep price discounts. But it hit the pause button in December to see how the market responds to the G7 price cap and the EU import ban which both took effect on Dec. 5.
Market
sources say that Turkey — which does not belong to the G7 or the EU —
may well increase its imports from Russia again fairly soon, once
refiners get a clearer idea of how things will play out.
Turkey
loaded only two Urals cargoes in December — both destined for the Tupras
Izmit refinery — with a combined total of 1.7 million barrels. That
equates to an average of around 55,000 barrels per day for the month.
During
the six months from June through November, the country imported an
average of 399,000 b/d of Russian crude, up sharply from the levels seen
last year, before Russia launched its invasion of Ukraine (see graph).
Back Door to Europe?
Because it is not
constrained by the EU's ban on imports of crude oil, traders say Turkey
could become a back door for Russian barrels to enter Europe by refining
them to make ultra-low-sulfur-diesel (ULSD), which is in great demand.
There
is a global shortage of at least 800,000 b/d of middle-distillate
products — diesel/gasoil, jet fuel and heating oil — and the bulk of
that gap between supply and demand is located in Europe.
Buying
Russian crude at current discounts of around $30/bbl to Dated Brent and
reselling it to EU countries in the form of diesel at a premium of
$40-$45 to Dated Brent is a lucrative proposition for Turkish refiners,
compared to domestic sales.
Turkey has five refineries with a combined capacity of 815,000 b/d. Diesel is the country's top refined product in terms of sales volumes, with consumption recently running at almost 330,000 b/d.
Turkish refiners tend to shun jet fuel production in favor of maximizing diesel output.
Azerbaijan's
Socar, which operates the 214,000 b/d STAR refinery in Izmir, is
capable of switching its entire jet production to ULSD, depending on
demand.
However, only half of the country's demand for diesel is met by domestic refiners and the other half has to be imported.
In
a country where inflation has been running above 80%, Turkey has a
clear incentive to source crude oil and imported products at the lowest
possible cost.
"Only a Question of Time"
With the EU
set to follow up its ban on crude oil imports with a ban on refined
products from Russia on Feb. 5, Turkey may well emerge as an important
destination for displaced cargoes of displaced Russian diesel.
Russia accounted for 80% of Turkey's crude imports in November and it's quite likely that this trade will pick up again in 2023.
"I think it's a question of time, not willingness," one market source told Energy Intelligence.
It's
unclear whether future purchases would comply with the G7 price cap or
whether Turkish refiners would sidestep the cap by relying on
non-Western shipping and insurance.
During a recent industry
conference in Turkey, Socar did not disclose how it would handle future
imports from Russia, saying it was "too early to say and would be wrong
to comment on that at this time."
But traders have previously said
that if Turkey could secure sufficiently attractive discounts from
Russian producers, it would not be unthinkable for the country's
refineries to switch exclusively to Urals feedstock.
Logistics could turn out to be an obstacle, however.
Counterintuitively,
the bulk of Turkey's incremental imports from Russia this year have
been loaded at Russia's Baltic Sea ports, rather than its nearby Black
Sea ports.
And finding tankers to make the trip from Northwest
Europe to the Mediterranean could be more difficult and costlier under
the G7 and EU sanctions, potentially requiring even bigger discounts to
retain the interest of Turkish refiners.