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The percentage of the Urals CFD trading concentrated in the prompt market has increased dramatically over the last several months, and market sources say this reflects fewer regular players and a lack of certainty for the future of sour crude supply in Europe.

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According to a Platts analysis of CFD data blocked into the Intercontinental Exchange, the proportion of total volume traded has started to skew increasingly towards the balance-month and front-month CFD contracts, both in Northwest Europe and the Mediterranean.

Since June, more than 90% of all of the Urals CFD volume blocked into ICE has traded on either a balance-month or a front-month contract, up sharply from the start of the year when only 76% of NWE CFD volume and 67% of Med CFD volume traded on the two promptest contracts.

The Urals CFD market acts a hedging tool for physical Urals cargoes in Europe and settles against an average of the Platts physical differential assessments each month. As a result, it is most heavily traded by participants with exposure in the physical Urals market and reflects expectations about Urals differentials independent of Dated Brent.

The CFD market frequently trades bilaterally and over the counter in transactions that are often invisible to the larger market, but is increasingly being blocked into the Web ICE system as a way to manage counterparty risk. Thus, while ICE-blocked only volume does not account for all of the traded volume in the Urals CFD market, it is a highly visible way to track it.



Traders said the shift towards a prompter market is reflective, at least in part, of the declining number of players in the Urals spot market as more physical volume has been concentrated in the hands of a few companies.

Since the onset of Western sanctions nearly two years ago, Russia's Rosneft -- the largest single exporter of Russian Urals out of both the Baltic and Black Seas -- has struck several major financing deals with trading houses in exchange for crude oil out of both the Urals program in Europe and the ESPO program in Asia.

As a result, the company -- which markets the majority of its available export volume via semi-annual tenders -- has been offering up less and less volume each tendering cycle.

The most recent tender, which covered Q4 2015 and Q1 2016 and was reportedly won by Gunvor, only offered 1.2 million mt-3 million mt monthly out of the combined Baltic Sea ports of Primorsk and Ust-Luga. This is down from the minimum 3 million mt per month the company offered out of the Baltic Sea over the Q4 2014 and Q1 2015.

Market sources said the shift has concentrated much of the Urals volume exported each month with a handful of companies, which has in turn restricted the willingness of other companies to participate in the Urals CFD market in even the most limited capacity.

"With all of the barrels mostly in the hands of three or four companies, there is no more business to be done," a trader said. "People can't properly use them and are pretty much going 'why bother?'"

While the Urals CFD market has always seen liquidity concentrated at the prompt due to the way the market trades, there was evidence in late-2014 and late-2015 that elements of the market were looking further forward as a means to hedge longer-term supply contracts, even if it was only into the next financial quarter.

According to Platts analysis, the first contracts with 2015 exposure started to tentatively trade in early October-2014. As of October 23, according to the Web ICE system, there is no open interest on any 2016 contract.

"[The prompt market] has become a lot more liquid," a crude trader said. "It's being used more as a hedging thing than as a speculative one."


However, sources said market uncertainties about the sour crude supply in Europe have presented the biggest hurdle in looking at a forward CFD market, with the very real possibility of an end to sanctions against Iran likely to add to volatility in the European Urals market.

"We have a good front end right now, but we're not comfortable pricing something like a Calendar 2017 Urals CFD," a crude trader said. "That's the sort of thing a bank could do, not a trader. There is huge uncertainty around what will happen if the Iranian sanctions are fully lifted because Urals differentials are going to get killed. A calendar contract is basically just guessing what is going to happen with Iran. You might as well toss a coin."

Furthermore, market sources said the increased flow of sour crudes from the Persian Gulf -- as well as the discounted flow of Kurdish crude from the Turkish port of Ceyhan -- has seen many traditional Urals buyers in the Mediterranean in particular diversify away from the grade in favor of alternatives like Basrah from Iraq, Arab Medium from Saudi Arabia and KBT from the Kurdish region of northern Iraq.

As a result, there are fewer and fewer market participants with a vested interest in hedging Mediterranean cargoes in the CFD market. According to traders and Platts tracking data, nearly all of the November Aframax program out of the Black Sea port of Novorossiisk ended in the hands of one buyer.

"It's difficult to predict," a crude trader said. "There are just so many uncertainties with Basrah Heavy and Light from SOMO, and there's this talk from the Iranians."

--Paula VanLaningham,
--Edited by Richard Rubin,