Urals Drop in Price But Strong in Crude Oil Fight for Europe

Published: 30 May, 2016 14:05

An increasing flow of Middle East crude to Europe has forced Russia’s Urals to fight for its place on the market. The Russian grade has dropped in price but managed to preserve its position in the region as one of the most popular.

Urals differentials have been surprisingly stable since the end of 2015, despite negative events, such as seasonal refinery turnarounds, resumed loadings from Iran and the start of Arabian and Iraqi supplies to northwest Europe, which would be expected to affect prices.

A small change in the market situation would have made Urals differentials jump a year ago, by as much as $1-1.50 a barrel against BFOE in a week’s time, but this year the changes are only 40-50 cents and lower. The maximum change in differentials this year has been 70-80 cents, but there have been no more than three such cases, Reuters data shows.

“Urals differentials are kind of stuck at one figure and don’t move away from it whatever happens,” one trader said.

New Rules

The increase in Middle-Eastern and West African exports to Europe in 2015 happened at the same time as crude oil exports increased from Russia, due to rising production and lower margins on local refineries after the fall of crude prices. The surplus of supply in Europe forced sellers to fight for buyers.

The new supply-demand balance changed market rules: trading firms used to be the market makers as they could easily understand refiners’ need and sell cargo with a significant premium, but now most refiners in Europe have a wide choice of different grades, which they use as a strong point in negotiations with sellers.

“Of course, I prefer Urals, but if a seller gives me some unreasonable prices I look at Iraq, Iran, Arabian grades,” said a big European refiner.

As a result European refiners are more fussy and buy crude at what they consider a fair price. Urals has also found its fair price these days, traders say, meaning Urals differentials has less volatility.

“When the market understood that there was a surplus supply of crude oil, Urals differentials fell, but after they hit the bottom, they strengthened to new levels and have remained there for a half year,” one of the major Russian crude oil market players said.

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