Tuesday was a day of recovery for risk assets after last week’s turmoil. US stock markets regained some ground following their worst week since 2020 as bargain hunters entered the fray. That being said, the backdrop of cooling growth and tightening monetary policy has not changed. Consequently, recession fears are still swirling. Goldman Sachs economists warned that the risk of a US recession is rising. The bank now sees a 30% probability of America entering a recession over the next year, up from 15% previously. In a similar vein, Tesla chief executive Elon Musk claimed that it was “more likely than not” that the US economy will enter recession in the near term. Recession worries are still front and centre of investors’ minds hence risk assets will be prone to further sell-offs.

Meanwhile, oil prices also pushed higher yesterday amid tightening fundamentals. Those of a bullish disposition are pinning their hopes on robust summer fuel demand. Indeed, a record number of travellers are expected to hit the roads for the July 4 weekend, according to AAA. Looking further ahead, ExxonMobil CEO said he expects tight oil markets to last anywhere between three to five years. Prices also drew support from expectations of another drop in US oil inventories. This week’s delayed EIA stock report is likely to show crude and gasoline inventories fell while distillate fuel stockpiles rose, according to a Reuters poll.

But it is a totally different story this morning. The oil market is plunging following reports that US President Joe Biden will call for the temporarily suspending of the federal tax on gasoline. The latest in a long line of attempts to temper surging prices at the pumps is having the desired effect. Yet whether this knee-jerk reaction will stand the test of time is by no means guaranteed.

Go East

Russian oil is off the table in the US and Europe because of sanctions. Still, Russia’s exports of crude oil are proving resilient as more oil has been flowing to Asia – primarily China and India. These two energy behemoths have drastically stepped up their intake of Russian crude, so much so that they are both taking more oil from the non-OPEC heavyweight than ever before.

China, historically the single biggest buyer of Russian oil, is displaying a ravenous appetite for cheap Russian oil. China’s crude oil imports from Russia soared by 55% from a year earlier to a record level in May, displacing Saudi Arabia as the top supplier. Shipments reached 1.98 mbpd last month which was up a quarter from 1.59 mbpd in April. The rise in India’s purchases of Russian oil has been even more dramatic. In May, refiners received a record 819,000 bpd of Russian oil, up from 277,000 bpd in April and next to nothing at the start of the year. As a result, Russia now accounts for 18% of India’s crude imports; up from 1% before the war. What’s more, Russia has moved from being an insignificant exporter of crude to India to the second-biggest supplier, behind only Iraq and ahead of third-placed Saudi Arabia.

Unsurprisingly, India has come under pressure from Western leaders to stop doing business with Russia. Yet it has brushed off criticism and pledged to continue buying “cheap oil” from Russia. In fact, Indian banks are said to be joining forces with Russian lenders not hit by sanctions to facilitate bilateral payments and ensure smooth trade flows. The message is clear – India will press ahead with purchases of cheap Russian oil. Sure enough, arrivals are set to increase this month. Russian crude exports to India are expected to increase to over 1 mbpd in June, according to commodities data and analytics firm Kpler. Chinese refiners are also likely to boost their intake as demand recovers from Covid lockdowns, especially when the price is more attractive compared to other grades.

The redirection of Russian oil from Europe to Asia is in full swing. All parties involved have an incentive in maintaining the status quo. Chinese and Indian refiners will feel compelled to continue importing discounted Russian crude to safeguard sky-high product margins. Meanwhile, Russia is making more money from oil and gas exports than it was before the war, thanks to the jump in prices. In view of this, it will be eager to lure both nations with heavy discounts to keep its oil flowing and ensure state coffers remain filled.

That said, there is a limit on how much oil India and China can realistically buy. Questions abound over how much more they can increase imports of Russian crude. This is especially pertinent as the EU ban takes hold over the coming months. Russia will need to find a market for another 1.1 mbpd before the year is out and itself admits that finding new markets will become increasingly challenging. Furthermore, there is another reason to doubt whether Russia will be able to maintain the same level of oil exports in the medium term. New logistical, insurance and payment hurdles pose a threat to export volumes. The recently introduced EU and UK insurance ban on ships carrying Russian oil means transporting Russian oil to Asia by sea will take longer and be more costly. This may deter some buyers even with discounts for Urals grade to the Brent benchmark running around $35/bbl. Russia’s oil machine has so far been an unexpected beneficiary of the war with Ukraine, but its good fortune is running on borrowed time.