Urals price hits $60 price cap level for first time

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 on December 5. This will pose a challenge for Europe’s shipping industry carrying Russian crude, S&P reports on July 12.

Platts, part of S&P Global Commodity Insights, assessed Urals on a FOB (free on board) 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.

Under the price cap sanctions rules, western shippers are not allowed to carry Russian crude if the contract prices is at or above $60 per barrel. Following the start of the war the price of Urals has tumbled as a large discount of as much as $35 between the price of Urals and that of the benchmark Brent oil opened up.

European shippers, particularly Greek shipping, has continued to legally transport Russian crude as long as the price remained below the cap. Greek shipping has seen its share of transport of Russian oil rise from 35% to 55% over the last year and a half, according to research by Institute of International Finance (IIF).

However, Greek shippers face a dilemma now as once the price of the Urals blend rises above $60 per barrel, they are no longer allowed to carry it without facing possible secondary sanctions.

“Urals values have been lifted along with other medium sour crude grades after Saudi Arabia and Russia pledged to slash their crude output by 1mn b/d and exports by 500,000 b/d respectively in August,” S&P Global said in a note “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.”

Russia's economy coming under more pressure

The price cap sanctions were designed to keep Russian oil flowing to world markets but at the same time restricting access to funds. And the sanctions seem to be having an effect.

The Central Bank of Russia (CBR) released data on the balance of payments for June this week, reporting a negative balance of $1.4bn – the first negative balance since August 2020, during the peak of the pandemic.

The Central Bank has attributed the weakening of the ruble to a decline in export earnings and seasonal factors such as dividend payments to non-residents. The trade balance decreased from $10.4bn in May to $6.4bn, primarily due to a drop in exports from $36.8bn to $32.5bn. Income payable, which includes dividends, increased by $3.1bn to $8.3bn.

The value of the ruble has also tumbled in recent weeks with the ruble approaching RUB100 to the dollar, which the central bank blamed on falling export revenues.

Nevertheless, the CBR improved its outlook for the Russian economy in June and is predicting mild growth this year thanks to falling inflation, rising real wages and a boom in state-led investment. Ministry of Finance (MinFin) is also predicting that it will be able to keep the budget deficit to 2% of GDP, or RUB2.9 trillion, as it is predicting that oil and gas revenues will pick up in the second half of this year.

Russian oil redirected

The Kremlin has responded to the oil sanctions by redirecting all the crude exports that once went to Europe to willing buyers in Asia, and India and China in particular, attracted by deep discounts Russia was offering.

However, as this trade flow built up the discounts between Urals and the Brent benchmark have been narrowing from a high of $35, and now is reportedly only $4, according to The Times of India.

Russian crude now accounts for about 40% of India’s total oil imports, up from less than 2% in before war. Indian refiners buy Russian oil on delivered basis, wherein the seller arranges shipping and insurance, to avoid falling foul of the sanctions. Russia has expanded an extensive “ghost fleet” of tankers that can carry export volumes and are not subject to sanctions. By using Russian ships, India and China avoid coming under sanctions pressure too and have been paying market rates for Russian crude.

However, December’s oil price cap sanctions  have splintered procurement by Indian refiners — especially state-run entities that are the biggest buyers. Shippers are charging $11-19 per barrel freight from Baltic or Black Sea ports, or nearly double the normal, while invoicing the crude at $1-2 less than the price cap,” a source told The Times of India.

Indian buyers could lose the discount soon if oil prices decline further and narrow the gap with the G7 price cap. Three little known agencies dominate shipping and insurance bids floated by Russia for shipments to India. These are not linked to global benchmarks. So they can easily game the tenders and bring the net cost of Russian oil close to the benchmark crude — currently at $75-76, The Times of India reports.

Sour grades shunned

Russia's top crude exports with shipments of around 2mn 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, reports S&P. 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 2.48mn 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 told S&P. "Demand remains strong from Indian buyers but there is a shorter Urals [export] program which means there is more competition."

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% sulphur and 31.7 API gravity, according to the Platts Periodic Table of Crude. As a result, supplies of Middle Eastern higher sulphur 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 February 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.