Spotlight: Urals is weakening with more production and alternative crudes pricing to compete in Europe

This Spotlight from S&P Global Platts Analytics was first published July 27.

The OPEC+ cuts have constrained the global supply of sour crude, as the largest production curtailments have come from Saudi Arabia, Kuwait, and other Middle Eastern countries. European refineries have seen lower monthly allocations as a result.

Simultaneously, Russia's July export schedule for Urals crude showed daily loadings at 780,000 b/d, the lowest volume since at least 2012, reflecting the extension of Russia's commitment to the OPEC+ cuts.

As a result, Urals cargoes in Northwest Europe in late June saw their highest values since 2001 at Dated Brent plus $2.00/b. This led many refineries to look to switch to medium and sour North Sea grades, such as Forties, Johan Sverdrup, and Grane, or even try to sweeten their slate.

However, combined August loadings of Urals crude are scheduled to be 320,000 b/d higher than July at 1.10 million b/d, according to the provisional programs just released, as Russia's quota is set to rise by 500,000 b/d August 1. With that change, pressure is building on differentials. For example, in the Platts Market on Close assessment process, Glencore offered a 100,000 mt Urals cargo loading August 8-12, basis CIF Rotterdam, down to Dated Brent flat and It was left outstanding at the close of the MOC.

Platts Analytics forecasts Russian compliance to slip over time as the call on OPEC+ rises to maintain market share as oil demand rebounds. Urals differentials vs Dated Brent should ease further, but with more than ample refinery conversion capacity, and still relatively low outright price levels, all quality differentials will remain narrower than, say, in 2015-2018.

The recent run-up in Urals differentials provided an incentive for European refineries to look at replacement grades, as well as increase blending of lighter grades, such as CPC Blend, with a heavier crude, such as Iraq's Basrah Light or Basrah Heavy, to produce a similar Urals-like grade.