Urals Attractive to Asian Refiners

SINGAPORE — Asian refiners are expected to extend imports of Urals crude despite its unusual rise to premiums to the European benchmark, as supplies of costlier Middle East grades are limited, industry sources say.

Flows of Urals to Asia are estimated to have risen to at least 5 million barrels per month since May, versus negligible volumes last year, as it becomes an increasingly attractive alternative to sour crudes from Gulf producers, traders said.

Prices of Urals rose to the highest premium against Dated Brent in at least 10 years this month, both for cargoes to be loaded from the Mediterranean and Northwest Europe.

The surge is due to the ongoing cuts in production by OPEC oil producers, which prompted the official selling prices of Middle East crude to rise, and strong demand from Asia.

But the higher prices of Russia’s main crude have not deterred major buyers such as China, Taiwan and recently India, because the spread between Brent crude and Dubai has turned negative, a rare occurrence since the European crude is a better grade.

The Brent/Dubai Exchange of Futures for Swaps, or EFS, has turned negative since the start of July, the second time this year since it fell to discounts in January for the first time on record. “The EFS is negative so arbitrage barrels should be OK,” said a trader with a refiner.

And in a sign that the negative value could persist, the September EFS, which took over as front-month on Friday after August Brent futures expire, is already at negative levels.

?€?It?€™s on the strength of sour barrels,?€? a Singapore-based trader said.

Hefty supply curbs from the Organization of the Petroleum Exporting Countries since late last year and especially since January, have mostly cut supplies of Middle Eastern crude.

?€?The East needs oil from somewhere. OPEC has cut quite a lot,?€? a Singapore-based trader said.
The Russian grade, normally shipped in very large crude carriers, had been largely shunned in Asia last year when Middle Eastern suppliers were showering refiners with as much crude as needed.

Regional refiners, such as Japan, lacked the capacity to take such large shipments of spot sour crude last year, when they had easier access to 500,000-barrel lots of Oman crude and had enough term supplies amid falling domestic demand.

Other than China and Taiwan, demand has surfaced from India, where the largest private refiner, Reliance Industries, has ramped up imports with the start-up of the new 580,000-barrel-per-day refinery.

The refiner, which will run a combined capacity of 1.24 million bpd when the second plant becomes fully operational in two months, has started to buy spot Urals crude from June loading onward, traders said.

But some signs are emerging that could limit demand for Urals: the Middle East crude market has started weakening for September barrels, with some sellers saying rival Oman crude is becoming more competitive.