Urals crude prices are trading close to 12-month highs as Russian forces converge closer to the Ukrainian border, with trading sources telling S&P Global Platts on Jan. 21 a possible invasion remains an "acceptable risk" for markets to absorb.
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The medium sour crude grade -- essential for Europe's refineries -- has climbed to its highest level in almost a year, with Urals CIF Rotterdam, last assessed Jan.20, at Dated Brent minus $0.75/b and Urals CIF Augusta at Dated Brent minus $0.45/b.
"Given the lack of barrels in the market, it's [invasion] an acceptable risk," said a Urals trader, speaking on condition of anonymity.
Concerns over Russia potentially crossing the border into Ukraine and provoking tougher international sanctions have rippled across commodities markets. Russia is the largest producer of oil and gas in the OPEC+ producer alliance, which controls around 45% of global supply. The country is also the largest supplier of crude to Europe's refining sector.
Over the course of the last 12 months, Urals CIF Rotterdam has averaged Dated Brent minus $1.90/b, with Urals CIF Augusta at a 20 cents/b premium. Urals current high represents a rise of 60% compared to its average over the last year and 77% higher than its lowest point in mid-July. Rival grades have climbed proportionately higher during the recent rally for crude in Europe. Medium sweet Libyan Es Sider grade -- sometimes used to substitute Urals Med barrels -- is trading at Dated Brent minus 30 cents/b, 78% higher compared to its average over the year.
Sweet grades in the Mediterranean such as Azeri Light are trading much higher than sour grades, Dated Brent plus $3.90/b, representing a rise of 210% on the average price for Azeri Light barrels over the past year. The comparable strength of sweet grades over Urals makes it unattractive to switch slates at present.
"It is hard to gauge the implications on physical trade in case of invasion/ sanctions," another Urals crude trader said speaking on condition of anonymity, adding they don't think Ukraine warrants a change in strategy.
However, with S&P Global Platts Analytics' expectations of OPEC+ sustainable spare capacity dropping to 800,000 b/d by June the market has limited buffers beyond state-controlled Strategic Petroleum Reserves to absorb any disruption to supply that could arise from Moscow ordering troops into Ukraine.
Integral to Europe
Nevertheless, the Ukraine tensions have exposed the dependence of Europe's refiners on Russian supply.
One European refinery source told S&P Global Platts they are unable to change their crude slate at present due to the tight supply in Europe. Yet in recent days, refiners have looked to sour grades, such as Urals, which provide better value than expensive Mediterranean sweet crudes, especially as the recent shortage in Libya barrels squeezed the market further.
Urals crude is a staple for refiners in northwest Europe and the Mediterranean. Key buyers include Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Poland, Romania, Turkey and Bulgaria.
The key grade is exported by both pipeline and sea. Seaborne deliveries are via two other major routes -- Primorsk and Ust Luga on the Baltic Sea and Novorossiisk on the Black Sea. Around 1 million b/d flows through the Druzhba pipeline system from Russia to Europe.
Andy tougher sanctions on Russia imposed by the US could be a bigger threat to the market than physical disruptions caused by a potential invasion.
However, with healthy refining margins and tight supply this is a risk many traders say they are willing to take, although sellers of Urals crude may have to severely discount cargoes in order to compensate for any increased administrative hurdles, market participants told Platts.
Another trader told Platts the "administrative cost in avoiding sanctions, such as sleeving or changing payment terms" could complicate the functioning of the physical market.
Sleeving is a term used to describe a third party purchasing directly from the seller on behalf of a buyer to avoid administrative hurdles. It is more commonly used when bilateral credit lines are not set up between two counterparties. Due to the presence of a third party it involves a fee and more financial risk.
Uncertainty is more evident in the paper market for Russian Urals cargoes.
Another trader told Platts declines in future contract for differences (CFDs) values were a sign of a possible slowdown in interest in Urals being traded on the physical market. Traders purchase CFDs in order to hedge their exposure to the physical spot price of barrels. The decline in future CFDs indicates traders bearish sentiment towards the declining price of Urals in the event of disruption to trading activity.