Med crude soars as traders seek alternatives to Russian grades: traders

Mediterranean grades Saharan Blend and Azeri Light have seen differentials soar as traders turn away from Russian crude, but bearish headwinds have led to the repeatability of such elevated values to be questioned by traders.

Algeria's Sonatrach hiked its official selling price for its Saharan Blend grade to Dated Brent plus $5/b, up $1.95/b for March, in response to growing demand following European buyers' refusal to purchase Russian-origin grades in the Black Sea following the country's invasion of Ukraine. Saharan Blend was last assessed by S&P Global Commodity Insights' Platts at Dated Brent plus $2.90/b on March 24, it's highest level since May 2007.

However, strong Dated Brent backwardation has dented volatile margins leading to increased prompt availability of cargoes, leading to downward pressure on Mediterranean differentials.

"It's insane more than strange," said a Mediterranean refiner, referring to the release of Sonatrach's April Saharan Blend OSP hike, with another trader saying: "I don't understand the OSP for Saharan Blend, it does not make sense."

"They may have sold one cargo at such a level when cracks spiked two weeks ago and they are using it as an excuse to step up the OSP there," said a third Mediterranean trader, adding that term customers would be frustrated by the dramatic rise in the April OSP.

A fourth trader based in the region said Saharan Blend offers were now around $3/b, sharply lower than the OSP, with barrels still available for the first decade of April.

Azeri Light has also seen differentials soar as it is viewed as a sweeter alternative to Mediterranean-loading Russian Urals. The Azerbaijani grade was heard to be as high as Dated Brent plus $5.50/b for April loading cargoes. The grade produces a strong jet fuel yield which has seen cracks fluctuate in recent weeks but remain at historically high levels to attract strong demand for the grade.

Azeri Light was last assessed at Dated Brent plus $4/b March 24, the highest level for over a month having climbed by $1.80/b since the start of March.

Despite European buyers rejecting Russian crude, bearish headwinds have emerged across the Mediterranean complex as steep Dated Brent backwardation has eroded strong margins.

Furthermore, traders noted that a redistribution of crude flows had added too much oil to the Mediterranean. "All volume is staying in Europe, then you have WAF imports, SPR releases, WTI and maintenance, so if you combine this with structure the effect is massive," said a sixth trader.

CPC loading delays

Despite the headwinds, news of a substantial delay to the full restoration of CPC Blend loadings from the Russian port of Novorossiisk following storm damage could push Mediterranean grades even higher. "Only 50% is loading," said the second Mediterranean trader.

As a result, market participants were expecting Mediterranean grades to continue to be supported at multi-year high levels. "With the CPC outage that will put some support [into differentials]," said a Mediterranean paper trader.

This had already been reflected in the paper market with CPC Blend contracts for difference $1.30/b higher than before the storm of March 23.

"Differentials for the remaining barrels should be rocketing up, " a seventh Mediterranean trader said.