Spot Market Unfazed by Drop in Urals Flows

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Buyers in the European spot crude market appear to be taking things in stride despite indications that exports of Russian oil have fallen by about a third since Russia launched its invasion of Ukraine.

Concerns about supply disruptions pushed Brent futures to an intraday high just shy of $120 per barrel on Thursday.

But traders in the physical market note that spot price differentials have either softened or strengthened by less than the paper market, suggesting that refiners are not too worried about being able to get their hands on crude feedstock.

"I think if we start seeing differentials being bid up to silly levels, which are the actual crude prices being paid ... [that] is when we need to worry," a refining source said.

A combination of financial and shipping sanctions and a general reluctance among buyers to do business with Russia has led to a sharp fall in flows of Russian crude and refined products.

This has prompted traditional buyers of Russia's Urals crude and other Russian grades in Europe to look for potential replacements.

Softer Spot Differentials

In theory, spot prices for grades that are potential substitutes for Urals should be surging now. But that has not been happening.

In the European market, Forties Blend, Johan Sverdrup and Grane are all potential substitutes, even though their combined volume of around 1 million b/d fall could not fill the gap created by a sustained absence of Russian seaborne exports.

However, Forties is currently trading at a premium of about $2.50 to dated Brent, which is 80¢ below the level seen prior to the start of Russia's invasion of Ukraine on Feb 24. Sverdrup and Grane have "not moved much," a market source added.

Similarly, Mars crude from the US, which usually augments supplies of Urals in Europe, has been trading at a premium of around 70¢-80¢ to West Texas Intermediate (WTI), down from its peak of $1.25 over WTI on Feb 24.

In the case of Mars, however, the softening of the premium may be partly attributable to the current steep backwardation of the Brent futures curve that makes exports of US crude to Europe unprofitable.

Buyers Keep Their Cool

For now, spot crude buyers seem to be keeping their cool, even though they need to find replacements for Urals.

One trader notes that it takes much less time to deliver Urals to a European refinery than Saudi, Kuwaiti or Iraqi crudes, "which would be the natural replacement."

Otherwise, however, Saudi Arabia's Arab Light and Arab Medium, Kuwait Export Crude, the UAE's Upper Zakum and Das Blend crudes, and Iraq's Basrah Medium are all acceptable replacements for Urals.

Among those producers, only Saudi Arabia and the UAE have significant spare production capacity that would allow them to expand exports, but they are constrained by the terms of the Opec-plus supply management pact.

Furthermore, with the exception of Iraq, most Mideast Gulf producers sell on a term basis, rather than a spot basis.

"If the market was tight, then refiners would be looking at buying, no matter what … So, if they are waiting, then they are confident of availability," a trading source said.

Bidding for spot cargoes could still pick up over the next week or two, but seasonal spring refinery maintenance and the big run-up in crude prices are also likely to dampen demand.

A refining analyst also pointed to the potential for a deal that would allow Iranian oil to return to the market, as well as expectations of additional supply from the US and Guyana, which do not belong to the Opec-plus alliance.

Oil Spot Markets, Oil Prices, Crude Oil, Oil Supply, Security Risk , Sanctions, Ukraine Crisis
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