One of the main reasons why the coronavirus-induced price slump feels so odd is that it is accompanied by a prolonged price war that has simultaneously dropped crude differentials, in many instances to levels unseen in the past 8-10 years. The price war was started by Saudi Arabia’s national oil company Saudi Aramco mid-March when it cut its April prices by $6-7 per barrel month-on-month, in a move that was at the time perceived as Riyadh’s claim to safeguard or even increase its market share come what may, a strategy that was continued with May-loading cargoes. Yet despite fears that Russia’s main export grade Urals will inevitably fall victim to such an aggressive Saudi marketing strategy, Urals’ allure has caught market watchers somewhat offguard.
There is no sole reason why Urals has not declined further and followed the pricing curve of Arab Medium or Arab Light. As a matter of fact, if one is to look at the dynamics of Urals pricing chronologically, the underlying reason why Urals differentials should not plummet has changed over time. This being said, outright Urals prices have bounced back from their lowest in the last 20 years – Urals Baltics went as low as $11.59 per barrel on April 21 (see Graph 1) whilst on that same day Urals Med declined to $12.09 per barrel. From here both the Baltic and Mediterranean outright prices rose to their current level of $16-17 per barrel, to actual premia against Dated Brent and even Azeri Light.
Graph 1. Outright Urals Prices vs Dated Brent in 2020 (USD per barrel).
But let’s take a dive first into the pallid statistics of crude oil differentials. Data indicate (see Graph 2) that right after the Russia-Saudi Arabia axis broke down and the crude market went into an uncontrolled freefall, Urals differentials reacted in a way that was to be predicted by market analysts. Urals had no other option but to react on Saudi Aramco dropping April OSPs – if Urals Rotterdam averaged a $-1.8 per barrel and Urals Med averaged a $-1.2 per barrel discount in January-February 2020, the second half of March turned out to be a spectacular tailspin. By April 01, both the Mediterranean and Baltic Urals stood at a $-5.4 per barrel discount, yet instead of dropping even lower, Urals started to get off the ground. Related: Is This The End Of The LNG Boom?
First, amidst Chinese crude demand coming back to life, Urals was supported by the remarkably beneficial economics of China exports. In the first days of April the ICE Brent – Dubai swap differential was at a whopping $6.20 per barrel discount which made long-haul voyages to Asia Pacific remarkably attractive for Chinese buyers. The end result of robust Chinese buying demand: a total of 19.7 MMbbls of Urals has set sail for China in April 2020, an absolute all-time high, beating the previous maximum by a whopping 7 million barrels. The total tally includes an unprecedented four VLCCs, all of which are en route to Shandong (of which three are going to Qingdao).
Mid-April Brent-Dubai differentials moved back into premium, only to decline in multi-dollar discounts during the last days of April – expect further Chinese buying runs of Urals as it happens. Evidently, Urals is by no means the only residue-heavy grade coveted by Chinese refiners, the US-produced Mars has become a hit of recent Chinese purchases. However, there seems to be an organic barrier to further US purchases as most American output is very light, in fact too light for Chinese refiners. Potentially, Chinese demand might also be satiated by Arab Medium or Arab Heavy cargoes from Saudi Arabia, yet according to market reports there is only scant spare additional capacity for these grades, with Riyadh actively promoting Arab Light and Arab Extra Light instead.
Graph 2. Urals Differentials vs Dated Brent in 2020 (USD per barrel).
Thus, Russian exporters could more or less avoid European demand declining, only to return to it once the window of opportunity shut down. Fuel oil cracks have been very supportive towards Urals acquisitions in Europe, penalizing other Mediterranean and Baltic crudes with a higher gasoline and kerosene yield, yet that is only half of Urals’ recent differential anomaly. The other reason, one might argue a much more substantial one, is Russian producers cutting back exports in accordance with the OPEC+ agreements. Comparing April and May exports from Russia’s main European ports provides a telling case in point – based on the preliminary May schedule month-on-month loadings in Primorsk have dropped by 42% and in Ust-Luga by 32%, whilst Novorossiysk will witness a hefty 60% drop.
Whilst coronavirus continues to paralyze Russia’s economy (President Putin has extended the lockdown until May 11, for the third time already, and most probably will be forced to do so at least once again as new cases still do not plateau), Russian exporters have been having a hard time placing their crude barrels – domestic demand has shrunk, storage is becoming ever-rarer so the only elegant way out is to bring forward field maintenance and cut exports. The only conduit not to see a massive May throughput cut will be ESPO – in fact, May loadings from Kozmino are headed for an all-time high of 0.765mbpd. The decision to keep ESPO supplies to Asia has obviously left an imprint on the Russian grade’s pricing, from a $2 per barrel premium to Dubai it went to $-4.70 per barrel in mid-April, only to reach its current level of a $-2.75/-3 per barrel discount to Dubai, i.e. the differential rebound was palpably smaller than in the case of Urals.
By Viktor Katona for Oilprice.com
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