Record Russian Oil Premium Vanishes on Refinery Run Cuts: Energy Markets

Russian crude’s unprecedented premium to North Sea Brent is vanishing as European refiners switch to higher-value blends and scale back purchases to protect their profits.

Urals export blend for delivery in northwest Europe rose above Dated Brent, the benchmark for two-thirds of the world’s oil, for the first time in August, before dropping back below Brent the past two days. It’s more likely to keep falling than resume those gains in the coming month, according to the majority of 13 oil traders surveyed by Bloomberg News.

“The Urals premium should be considered a temporary phenomenon,” David Wech, head of research at JBC Energy GmBh, a Vienna-based industry consulting firm, wrote in a report this week. “Lighter grades are beginning to look cheap in comparison” for refiners, he said.

The profit from cracking, or reprocessing, Urals blend in northwest Europe dropped to $2.69 a barrel last week, the lowest in almost a year, according to data compiled by Bloomberg. It has averaged $6.94 a barrel in 2010. Europe Union countries import 34 percent of their crude from Russia, data from the European Commission show. Total SA, Royal Dutch Shell Plc and Neste Oil Oyj are among refiners that process the Russian blend.

Nine of the traders surveyed by Bloomberg said they expected Urals to keep declining, while three said prices will remain little changed and one predicted they will rise before dropping again. The poll was conducted Sept. 1.

Higher Sulfur Content

The Russian crude was at $75.85 a barrel today, 22 cents below Dated Brent, Bloomberg data show. It rose as high as 5 cents above the benchmark on Aug. 31, compared with an average of $1.51 a barrel below Brent this year.

The Urals grade has a higher sulfur content than many grades, making it less attractive to refiners because of the extra processing needed to remove pollutants and meet environmental standards. It contains about 1.4 percent sulfur, compared with 0.56 percent for Forties, the largest North Sea blend.

Forties had a premium of 17 cents a barrel to Brent today, compared with an average discount of 11 cents this year, according to Bloomberg data.

Urals has jumped in the past three weeks, narrowing its discount to Brent by $1.86, as declining shipments from Russia created a shortage of prompt supplies and refiners faced difficulties buying alternative crude from the Middle East.

Baltic Shipments

Shipments from the Baltic port of Primorsk will drop 3.7 percent in September, while tankers will load about 2 percent less oil from Novorossiisk on the Black Sea, according to loading plans obtained by Bloomberg News.

Russia is the biggest supplier of crude to Europe. The 27 members of the European Union imported about 3.7 million barrels a day of the oil from the country in 2007, according to European Commission data.

United Nations sanctions against Iran are making it harder for European buyers to finance oil purchases from the Persian Gulf nation, according to Wech. The UN Security Council imposed a fourth set of sanctions June 9, curbing financial transactions and tightening an arms embargo.

“Some of the Iranian grades are fairly close competitors with Urals,” Julian Lee, a senior energy analyst at the London- based Centre for Global Energy Studies, said yesterday. “A knock-on effect of these sanctions is going to be greater difficulties for European refiners buying Iranian crude.”

European imports of Iraq’s Kirkuk crude, another sour grade that competes with Urals, have also been disrupted as supplies via the Kirkuk-Ceyhan pipeline were halted for four days after a bombing on Aug. 20.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

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