Urals, Dubai could strengthen relative to Dated Brent if Russia-Ukraine peace deal agreed

As the US tries to broker a Russia-Ukraine peace deal, traders say an end to the conflict could strengthen both Urals and Platts Dubai values relative to Dated Brent, putting significant pressure on the global sweet-sour benchmark spread if sanctions on Russian crude are lifted.

The peace talks raise the prospect of more Urals volumes making their way to Europe -- a market that has been largely off-limits to Russian crude since the invasion of Ukraine in February 2022.

That shift in flows, in turn, could prompt India and China, which have taken advantage of discounted Russian supplies throughout the war, to seek barrels from Middle Eastern producers, traders said.

Harry Tchiliguirian, group head of research at Onyx Capital Advisory, said that Brent could weaken relative to Dubai if European refiners take Russian medium sour flows to maximize diesel output.

Dated Brent reflects the physical value of light North Sea crude oil, with the alternative delivery option of WTI Midland crude. Platts Dubai is the benchmark for Middle Eastern medium heavy sour grades.

"That would mean that incremental demand from India for medium sour would have to source it from the Middle East," Tchiliguirian said.

"With European refiners getting their preferred quality of crude, they will not bid on North Sea sours like Johan Sverdrup, but also will buy less WTI [Midland], the latter which has been setting the price of Dated Brent [and] would have to discount more to be absorbed in Europe," he added.

Russian crude has been subject to heavy Western sanctions that have resulted in Urals trading at discounts -- at times significant -- to Dated Brent. Restrictions include a price cap on Russian oil imposed by the G7, the EU and Australia that came into force in December 2022 and has weighed on Russian grades.

The Urals discount to Dated Brent reached $42/b in April 2022, according to assessments by Platts, part of S&P Global Commodity Insights. This has since narrowed and was last assessed at $14.50/b on March 13.

Supply impact

Cheaper Russian barrels have edged out some Middle Eastern volumes from Asian markets, including India and China, which have both massively increased seaborne imports of Russian crude.

In Asia, refinery feedstock managers and traders are keeping a close watch on the Brent-Dubai price spread. The Brent/Dubai Exchange of Futures for Swaps, or EFS spread -- a key indicator of Brent's premium/discount to the Middle Eastern benchmark -- has been trending sharply lower in recent weeks, averaging 49.4 cents/b to date in March, down from February's average of 63.3 cents/b and January's average of $1.50/b.

A weaker EFS makes various sweet crudes produced in the Americas, the North Sea, the Mediterranean and Africa that are linked to the European benchmark more economical compared with Dubai-linked Middle Eastern grades.

If the peace talks progress, the Brent-Dubai spread could fall closer to parity, according to refinery feedstock managers in South Korea and Thailand, as well as traders based in Singapore and Hong Kong.

"WTI Midland and several West African grades could be very attractive if the EFS maintains the downtrend," a feedstock strategist at a state-run Thai refiner said.

However, plans by the OPEC+ alliance to begin rolling back some 2.2 million b/d of production cuts gradually from April could add more Middle Eastern sour supplies to the market and weigh on Dubai.

Sanctions relief could narrow the discount on Russian crude, bringing Urals and Dubai prices closer and reducing the relative appeal of Russian barrels.

Analysts at Renaissance Capital estimate that lifting US sanctions on the Russian oil sector could mean the removal of restrictions on the vast majority of sanctions-designated tankers carrying Russian oil.

"This would lower the transportation costs and consequently reduce discounts on Russian crude by around $5/b," they said in a note released March 11.

To be sure, a peace deal does not appear imminent. Russian President Vladimir Putin on March 13 said he was open to a 30-day ceasefire that Ukraine has already agreed to following talks with US officials, but added that there were many more conditions he would like to see met before signing off on any deal.

A difference in approach could also develop among sanctioning countries, with many European officials remaining steadfast in their commitment to measures against Russia. The EU's top sanctions envoy, David O'Sullivan, told Platts in February that any sanctions relief for Russia would depend on Moscow accepting responsibility for its invasion of Ukraine and agreeing to a reconstruction plan. In the meantime, the EU will look to crack down on Russia's shadow fleet, O'Sullivan said.