Russia’s refiners are processing so much of the country’s Urals crude that exports via the Baltic Sea have tumbled to the lowest in 20 months, driving prices close to parity with Brent.
Shipments from Primorsk, Russia’s largest port on the Baltic, will be 953,000 barrels a day in June, down from a five-year average of 1.4 million, a loading program obtained by Bloomberg showed. The grade sold for 3 cents a barrel less than Dated Brent in northwest Europe as of June 4, the smallest discount since August, when it traded at a premium.
The narrowing discount shows how refiners such as OAO Rosneft are responding to President Vladimir Putin’s drive to encourage plant upgrades and improve fuel quality via a lower export duty for oil products. Revenue from crude and gas exports account for more than half of the government budget in Russia, the world’s biggest energy producer.
“It’s the first time in a very long time that I’ve seen Primorsk exports below 1 million barrels a day,” Ehsan Ul-Haq, a senior market consultant at Walton-on-Thames, England-based KBC Energy Economics, said in a June 5 interview. “In July, I would expect the flows to return to Primorsk and for the price to fall again.”
Urals, which typically costs less than other grades due to a higher sulfur content that requires more refining, has averaged $1.44 a barrel less than Brent in the past five years, according to data compiled by Bloomberg. The discount was as wide as $2.25 on April 3 and was 43 cents today, the data show. Brent rose to $104.56 a barrel today, its highest level in almost three weeks.
The price may retreat again in the coming weeks, according to a majority of crude traders and analysts in a June 5 survey by Bloomberg News. Eight of 11 respondents forecast a decline and three predicted an increase.
The return of Russian refiners following spring maintenance is also keeping crude away from export markets. The country’s available oil-processing capacity rose to a 13-week high as of June 5, data from the Energy Ministry in Moscow show.
“Summer means the refineries go at full tilt,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in a phone interview June 5. “Demand in Russia traditionally peaks in the third quarter and you can feel the impact, especially in seaborne exports.”
Russia has prioritized exporting its crude via the Baltic at the expense of Novorossiysk, its largest Black Sea oil port. OAO Transneft, the nation’s pipeline operator, spent $3.3 billion building the Baltic Pipeline System-2 to Ust-Luga, the second-largest export terminal on the Baltic.
The development added 30 million tons a year in crude export capacity from the Baltic when the pipeline opened at the end of March 2012. Urals shipments via Novorossiysk fell 11 percent in the first quarter from a year earlier.
“Russia has been privileging the Northwest Europe market up to now,” Massimo Vacca, head of investor relations at Saras SpA, the Italian refiner 13.7 percent owned by Rosneft, said by phone from Milan on June 5. “However, we think the shortage is just short term while the Mediterranean has long-term structural issues.”
In May, loadings from Novorossiysk fell to 666,794 barrels a day, the lowest since January, according to data compiled by Bloomberg. Urals in the Mediterranean rose to a premium of 10 cents to Dated Brent on May 10, the highest since August.
“A month ago it was the opposite with the tightness in the Mediterranean,” said Ul-Haq, a veteran of Vienna-based OMV AG with almost 20 years of experience in the oil industry. “It now looks as though they have diverted crude there rather than to northwest Europe.”
Daily combined exports from Primorsk and Ust-Luga this month will be lower than at any time since February 2012, according to data compiled by Bloomberg. Ust-Luga will handle 464,000 barrels a day, down 6.5 percent from May, loading programs obtained by Bloomberg show.
Exports to Europe are also waning as Russia increases shipments to Asia via the East Siberia-Pacific Ocean pipeline. Exports of ESPO in June will rise 42 percent from a year earlier to about 415,000 barrels a day, according to a loading program obtained by Bloomberg, following an expansion in April.
Under measures introduced in 2011, Russian crude exports are subject to a 60 percent tax rate, while a single tariff applies to refined products at 66 percent of the rate due on crude. That gives companies a bigger incentive to sell products such as diesel to foreign buyers.
“Due to the design of export-duty system, Russian refining is implicitly subsidized,” Arsenije Dusanic, an analyst at JBC Energy GmbH, a Vienna-based researcher, said by e-mail May 29.
The biggest oil producers in Russia have agreed with the government to improve the quality of refined products by 2015. Rosneft, the world’s largest publicly traded oil producer, plans to spend as much as $14 billion to upgrade its operations, including 16 new units.
OAO Lukoil, Russia’s second-biggest producer, gets margins of as much as $200 a ton for oil products on the domestic market, billionaire Vice President Leonid Fedun said during an investor call May 28. Diesel in northwest Europe is currently trading at about $900 a ton, which equates to about $150 a ton, or about 17 percent, more than the equivalent price for Urals, according to data compiled by Bloomberg.
“The domestic market is a premium market for this company,” as Lukoil cuts exports via the Black Sea, Fedun said.
Putin has called for production to be maintained at more than 10 million barrels. The country produced 10.48 million barrels of crude and condensate a day in May, according to preliminary data from the Energy Ministry’s CDU-TEK sent June 2. The post-Soviet record was set in November at 10.49 million barrels a day.
“Production isn’t growing,” VTB’s Kryuchenkov said. “So when there’s a bump in domestic demand, the oil’s got to come from somewhere.”