Analysis: Russian crudes flip to premiums on N Asian buying appetite, Urals shortage

Singapore — Price differentials for Far East Russian crudes flowing to Asia over July have risen sharply in recent days amid firm demand from North Asian buyers and a shorter Urals loading program in the West, curbing excessive Russian crude supply to Asian and European markets.

The price for July loading cargoes of Russia's medium sweet ESPO Blend -- a favorite among China's independent refiners -- shot up to premiums of between $2.50/b and $3/b over Platts front-month Dubai crude assessments, results from a recent spot market tender showed this week.

"Demand into China seems fairly robust now, with new quotas and domestic pricing, they have rushed to buy what they are used to, for example, Oman and ESPO etc," a Singapore-based crude trader said.

Last month, ESPO traded in deep discounts of around minus $4.50/b to minus $5/b under Dubai, for similar cargoes loading over June.

Chinese refining activity has been on a steady climb since April, as the country is one of the first to ease COVID-19 restrictions, market sources said.

Crude oil throughput at China's domestic refineries edged 0.8% higher year on year to 13.16 million b/d, or 53.85 million mt, in April, posting the first uptick since the coronavirus outbreak, the National Bureau of Statistics' data released Friday showed.

Market sources from China reported that there was robust buying of June-loading ESPO cargoes in the secondary market this week. A recent trade was concluded at premiums of around $3.50/b against ICE Brent crude futures on a DES Shandong basis, according to a Dongying-based independent refinery source in Shandong, while July cargoes were being offered at premiums ofaround $3.50-4.50/b against ICE Brent futures on a DES Shandong basis.

Meanwhile, in a presentation of its Q1 earnings released last week, Russian crude giant Rosneft said the decline in oil demand has so far been less severe in May than April. Oil demand in Europe slumped 28% year on year in April, and fell 22% in May. In the Asia-Pacific region, Rosneft estimates that oil demand sank 18% year on year in April, and 12% in May.

SOKOL STRENGTH

The gain in Russian crude prices in China has also bled into other North Asian countries, with the price differential of Russia's Sokol crude flipping into premiums for the first time in two months this week, market sources told Platts on Monday.

India's ONGC sold one 700,000-barrel Sokol crude via tender for loading over July 18-24 to a South Korea-based end-user at a small premium of around 10-15 cents/b to Platts front-month Dubai crude assessments on a CFR basis, sources close to the matter said.

ONGC had earlier sold a July 7-13 loading Sokol crude cargo via tender to a Japan-based buyer at a discount of around $1.75-$2/b to Platts Dubai on a CFR basis, traders added.

Sokol crude last traded at a premium in mid-March, when a May loading cargo changed hands at $3.25/b, Platts data showed.

Traders attributed the uptick in prices to OPEC and its allies' -- Russia included -- crude production cuts, as well as improved market sentiment as more cities around the world emerge from COVID-19 lockdowns.

"Market is getting stronger now due to OPEC cuts," another Singapore-based crude trader said, adding that prices for competing barrels from the Middle East crude market, including Abu Dhabi's Murban crude, were also higher on the back of supply cuts.

RUSSIAN OPEC+ CUTS

Russian crude output is expected to decline by 2.5 million b/d in May and June, 2 million b/d over July-December, and 1.5 million b/d in January 2021-April 2022. Its baseline for cuts under the latest OPEC+ agreement is 11 million b/d. The country's May loading Urals program has already been cut nearly 40%, shrinking supply of medium crude barrels to European and Asian markets, crude traders said.

"Generally in the global pool, heavier crude is in shorter supply due to a smaller Urals loading program in Europe and long standing constraints in terms of Venezuelan and Iranian oil that is off the market," a Singapore-based crude trader said.

Excess Urals barrels are often arbitraged over to Asia from Europe, but with the latest loading program reduced by nearly 40% from the previous cycle, a dearth of Urals availability in Asia would imply that regular buyers would seek other familiar Russian alternatives.

Overall May loading of Urals crude are scheduled to be 865,890 b/d lower than April at 1.25 million b/d, the lowest for the medium-sour grade in at least eight years, according to the provisional program seen by Platts at the end of April.

Earlier this month, Russian energy minister Alexander Novak said he expects Russian oil output to be down 19% in May from February 2020 levels. He said that production is likely to fall by 10% year on year in 2020.