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Russia's Sokol crude premiums tumble amid tepid demand, unfavorable economics

Highlights

Cash differentials for January-loading Sokol crude plummet

Sluggish demand and unfavorable economics pressure Russian crudes

Spot premiums for January-loading Russian grades are suffering from a steep decline from earlier in the month, with OVL's second Sokol tender being the latest causality in the fast falling market.

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India's ONGC Videsh Ltd, or OVL, was heard to have awarded its second tender of the month offering a 700,000-barrels of Sokol crude loading over Jan. 23-29 to SK Energy at a premium of low $6s/b to Platts Dubai crude assessments, CFR Yeosu, according to market participants, though information on the buyer could not be verified at the time of writing.

In comparison, OVL's earlier tender offering a similar-sized parcel of Sokol crude loading over Jan. 8-14 was heard to have been awarded to a Japanese trading house at a premium of around mid $7s/b to Platts Dubai crude assessments, reflecting a strong retracting in cash premiums for the grade.

Market participants cited several factors resulting in the softening premiums, including a bearish sentiment developing in the global crude markets, which was exacerbated by weaker demand from end-users, narrowing backwardation and Brent/Dubai EFS, as well as increasing viability of arbitrage cargoes.

"The bearish sentiment [comes] mostly from the talks on the drawdown of SPR and COVID-19 situation in Europe," said a crude oil trader based in South East Asia.

A sharp decline in cash differentials for Russia's ESPO Blend was also seen in this trading cycle, as demand from key buyers in China tapered off, S&P Global Platts reported earlier.

"I feel buyers are slow this month, they don't want to pay high, demand doesn't support high price," said a crude oil trader based in Singapore. "Monthly spread [backwardation] is much lower than earlier in the month, arrival cost of arbitrage cargoes is also cheaper."

The Dubai M1-M3 spread was last assessed at $3.22/b on Nov. 22, and has been on a downward trajectory since Nov. 11, when it was assessed at a multi-year high level of $3.96/b, according to Platts data.

The shrinking backwardation reduces the advantage of procuring short-haul cargoes such as Sokol crude for end-users, pressuring premiums for the grade.

Brent/Dubai Exchange of Futures for Swaps, a key indicator of the relative economic attractiveness for Dubai-linked cargoes such as Sokol crude over Brent-linked alternatives, has also narrowed rapidly over November, further weighing on cash premiums.

Front-month Brent/Dubai EFS averaged $4.49/b in the third week of November, as compared to $5.26/b in the first week of November, S&P Global Platts data showed.

"I think the sentiment has softened, we can see the cracks and also refining margin has been falling," said the first trader.

OVL is not expected to issue any further tenders for January-loading Sokol crude, according to a company source.

However, several cargoes of January-loading Sokol crude held by ExxonMobil and Trafigura remain available in the spot market, said the Singapore-based trader.