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Realigned Oil Trade Upends Market Pricing

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Sanctions on Russian oil have forced European refiners to buy more crude closer to home and further afield, while Russian oil now must bypass Europe and attract more customers in Asia. Both forces have pushed Europe’s dated Brent to a huge $10 per barrel premium and Russian Urals to a steep $35/bbl discount — blowing out spreads that used to be $3/bbl during tense times before the Ukraine war started in February. The distortions seem bound to intensify as Europe is only halfway to displacing Russian crude ahead of the EU ban, which takes effect by year-end. Finding alternatives for yet another 1 million barrels per day or so of Russian crude is possible but will be costly. Western European refiners are replacing seaborne Russia’s Urals cargoes, which take a week to sail, with short-haul crude from the North Sea and are bidding up prompt cargoes. The war has also made prices extremely volatile, spurring refiners to favor the spot market to shuttle supply on an “as needed” basis. This way, they also avoid expensive hedging and margin calls on cargoes tied up in long sea journeys. In the Mediterranean, outages in Libya have kept the regional light, sweet market on edge, with only Algeria emerging as a steady but maxed out supplier. More distant spot options include Atlantic Basin crudes. Discounts for light US crude, which sails to Europe in 20 days, have widened to $17/bbl versus dated Brent. More valuable Nigerian crude takes 12 days to travel and is fetching up to $9/bbl premiums over dated Brent.

Topics:
Ukraine Crisis, Oil Prices, Crude Oil, Oil Trade, Oil Spot Markets
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