12 Jul 2023 | 14:54 UTC

Russia's Urals crude hits $60/b price cap as OPEC+ output cuts bite

Highlights

Russian crude export cut set to tighten sour crude market

Urals discount to Brent shrinks to lowest since Ukraine war

Sour crude market under pressure from Kurdish exports impasse

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The value of Russia's key Urals crude export grade has hit $60/b for the first time since the US-led G7 coalition rolled out its price cap on Moscow's oil, in a move set to test the shipping industry's resolve to continue transporting Russian crude.

Urals values have been lifted along with other medium sour crude grades after Saudi Arabia and Russia pledged to slash their crude output by 1 million b/d and exports by 500,000 b/d respectively in August. An ongoing impasse between Turkey and Iraq blocking some 450,000 b/d of sour Kurdish crude flow via Ceyhan is supporting sour crude values.

Platts, part of S&P Global Commodity Insights, assessed Urals on a FOB Primorsk basis at $60.32 /b on July 11, the highest level since mid-November 2022 before the $60/b price cap on Russian crude came into force.

Designed to keep Russian oil flowing to world markets while hitting Moscow's oil revenues, G7 restrictions on shipping Russian crude bought for more than $60/b came into effect on Dec. 5, 2022. The price cap targets the provision of shipping insurance and other maritime services for cargoes of Russian crude acquired FOB values over $60/b. As Urals had been trading well below $60 since December, traders and shippers will only now have to worry about falling foul of the price cap ceiling on Russian crude.

Russia's top crude exports with shipments of around 2 million b/d, Urals was the main price indicator for medium sour crudes trading in Europe but the war in Ukraine saw it widely shunned by traditional Western customers, providing a glut of discounted crude for willing buyers in India and China. But the recent OPEC+ moves to support oil prices have tightened the sour crude markets.

Although Russia showed few signs of following through on voluntary output cuts pledged earlier in the year, the latest data suggests Moscow is already curbing export shipments. Russian seaborne crude exports fell 39% on the week to 2.48 million b/d during the week ending July 7, the slowest rate of the year, according to tanker tracking data from S&P Global Commodities at Sea.

"Tighter supply from OPEC+ cuts, as well as higher domestic refinery run rates, have helped to push differentials up," one European oil trader said. "Demand remains strong from Indian buyers but there is a shorter Urals [export] program which means there is more competition."

Sour crudes

Saudi Arabia is also prioritizing its medium sour and lighter grades in this round of cuts as they are very similar to Russian Urals being traded widely in the Asian markets. Urals is somewhat close in specification to Arab Light, with 1.7% sulfur and 31.7 API gravity, according to the Platts Periodic Table of Crude. As a result, supplies of Middle Eastern higher sulfur crudes available for export to Atlantic Basin refiners have been absorbed by Chinese and Indian refiners.

Platts European Sour Crude Index versus the Dated Brent Strip was assessed at $1.628/b on July 11, the highest since August 2022 and well above pre-war average levels of around minus 90 cents/b.

"Europe remains fundamentally short in sour crude supply as the standoff between Iraq and Turkey continues ... exacerbating the tight sour crude availability situation in Europe as the region's refiners continue to replace Russian Urals with alternative grades following Russia's invasion of Ukraine," S&P Global oil market analysts said in a recent note.

With medium, sour Urals crude values rising, the financial incentives to ship discounted Russian crude to Asian or other non-Western buyers are also being eroded.

Urals traded at a discount of below $19/b to Dated Brent on July 7, the lowest discount since Feb. 28, 2022, four days after Russia's full-scale invasion of Ukraine. Prior to the invasion of Ukraine, the discount was less than $10/b to Dated Brent. Since the conflict started, Urals has at times traded at a discount of more than $40/b.

Discounts for Russian Urals crude delivered to the West Coast of India have also been narrowing in recent weeks. The margin between Urals crude delivered to the West Coast of India and Forward Dated Brent narrowed to $7.7/b on July 11, according to Platts assessments, down from a peak of $18.8/b soon after Platts began assessing the value in mid-January.


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