MOSCOW (Reuters) – * Urals arbitration from Europe to Asia stopped in summer 2020;
* Shipments of competing Norwegian oil, Johan Sverdrup, to Europe increased due to falling demand in Asia;
* CPC Blend remained on the European market, attracting refiners at a low price;
* Urals is trading again at a discount to the North Sea benchmark.
A sharp drop in arbitrage shipments of European grades of oil to Asia in September allowed the Old World market to avoid a shortage of raw materials, but put an end to the rally in quotations of Russian oil Urals, traders interviewed by Reuters said.
Oil demand in Asia, especially in China, which saved suppliers from overstocking last spring, when demand for fuel was minimal due to quarantine restrictions, fell by the fall, closing arbitrage opportunities for European varieties, including Urals, and saturating the European market again offer, showed data from traders and ship tracking systems at the Refinitiv Eikon terminal.
European refiners, who were shocked in the summer by a sharp drop in Russian oil supplies, already in August began to successfully replace the volumes of Russian Urals oil dropped from the market due to the OPEC + pact with alternative grades.
Thus, the Norwegian Johan Sverdrup, which is the closest in quality to Urals, and the lighter Caspian oil CPC Blend, which is more attractive at a price, have replaced the Russian grade in the basket of a number of European refineries, according to the data on supplies.
“With the Urals shortage, its traditional buyers switched to Jonan Sverdrup and CPC Blend,” said a trader working for a global trading house.
According to data in the Refinitiv Eikon terminal, Johan Sverdrup's supplies to Asia in August fell to 0.6 million tons, while in April-May they were about 1.5 million tons per month.
At the same time, supplies of the new Norwegian variety to the European market jumped to a historic record by August and amounted to 0.9 million tons against only 0.2 million tons in May this year.
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Urals differentials in Northwest Europe strengthened to a premium to the North Sea benchmark at the end of April, when it became known that Russia would sharply reduce its export of the grade through seaports. The premium for the Russian grade to the benchmark reached a record $ 2.35 per barrel.
At the same time, in absolute terms, oil prices remained low due to quarantine restrictions and the collapse of the OPEC + deal in March. China, which went through quarantine earlier than other countries, bought cheap oil for the future, including Urals – this was profitable, despite the premium of the Russian grade to the standard. In May and June, despite the new restrictions imposed by OPEC +, arbitration of Urals from Europe to Asia amounted to about 1.5 million tons.
By the fall, when prices rose slightly and storage facilities in Asia were full – problems with unloading oil in China persist for the fourth month – the arbitrage flow of European oil fell sharply.
So, shipments of Urals and CPC Blend to Asia in July-August 2020 fell to 0.6-0.7 million tons – a minimum since February 2018 – against a record 5.6 million tons in April 2020, according to data in the Refinitiv terminal. Eikon.
Eastbound Urals arbitration came to a complete halt in July.
The reduction in the arbitrage flow coincided with a change in the structure of demand for different grades of oil in Europe. In the summer of 2020, many processors revised their basket of purchased varieties, increasing the share of CPC Blend in the raw material structure, which was facilitated by an abundant supply of light varieties from West Africa.
The closure of arbitration for Urals in Asia, the redirection of CPC Blend and Johan Sverdrup to refineries in Europe and the reduction in the load of regional refineries due to weak margins allowed the region to painlessly cope with the reduction in supplies from the Russian Federation.
As a result, Urals prices have fallen from historic highs, weakening to a discount in Northwest Europe and the Mediterranean in August.
Fluctuations in demand periodically push Urals parties to a small premium to dated Brent, traders say, but the Russian grade is heading for a return to a stable discount to North Sea Brent, they believe.