The Russian Urals oil brand could soon become a new benchmark at the global markets. Trading of the brand’s export futures will begin at the end of 2016, which will allow establishing an honest price for each barrel and replenish Russia’s budget. Urals will cost more than the widely recognized North Sea Brent.
This was announced by Mikhail Temnichenko, executive vice-president of the St. Petersburg International Mercantile Exchange, or SPIMEX, in a statement to Russian Gazette. Experts believe that increasing oil volumes, which will be traded in rubles, will significantly improve the Russian currency’s standing in the global financial system.
Currently, Urals is sold outside the exchange, mainly through direct long-term delivery contracts. This means that only the counterparts of these transactions know the price of the commodity. It also makes Urals dependent on Brent’s exchange price. The Russian brand is cheaper than its North Sea counterpart, as it is a heavy crude composition of oil produced in Ural, Western Siberia and Povolzhye, making it more costly to produce gasoline from it than from the lighter Brent.
“According to data provided by Platts, a barrel of Urals has been traded with no more than a $4 discount off Brent’s price over the period from 2010 to 2016. At times, Urals even cost more than Brent, when there was a deficit of heavy oil brands’ deliveries from Iraq and Iran,” says Andrey Kochetkov, an analyst at Open Brokers. “The lifting of sanctions from Iran this January has made a negative impact for the price of Urals: during the last three month it is within a $1.65-$1.90 discount range.” Mikhail Temnichenko considers that the discount should be $3 to $5 per barrel. Related: Iran’s Masterplan To Ramp Up Energy Exports
Exchange trades, as opposed to those outside the exchange, operate in a transparent environment and in accordance to strict rules: benchmark prices are known to the whole world and the competition between them is close to ideal. This allows us to say that prices formed at the exchange are objective.
“An establishing of a benchmark at the oil market is a serious shift in the global system of price formation with a span of several years. We expect the new benchmark to obtain international status and crude oil would be traded in Europe and Asia in accordance to it,” stated Mr. Temnichenko. He believes that Urals and Brent could easily coexist.
SPIMEX will be the exchange for Urals delivery futures trading. Settlement futures trades have been decided to be left aside for the time being. According to SPIMEX, this will help to reduce speculation.
Urals futures will be traded with the following parameters: contracted volume will be 1,000 barrels, delivered lot – 720 000 barrels, FOB Primorsk delivery basis. Related: $120 Oil As Soon As 2018?
Trading of the ESPO oil brand that is delivered through the Eastern Siberia-Pacific Ocean pipeline is planed next. The price for this brand is currently revolving around the UAE Dubai Crude brand. Delivery will be made from the Primorsky Krai (region) port of Kozmino.
Trading will be done using the U.S. dollar at first. “The quotation must be easy to use for the market participants: our delivery futures will be easy to integrate into their established processes, which will, in turn, help the trades to gain liquidity,” said Mr. Temnichenko. “Trading in rubles can be considered later, after the brand receives the reputation of a recognized benchmark.”
The Russian currency has suffered greatly over the past two years, taking consecutive blows from imposed sanctions and especially from the collapse of oil prices. The ruble continues to be closely tied to the developments in the oil market, as was indicated by Tim Clayton of Economic Calendar. This leads Andrey Kochetkov to believe that the transition to trading in rubles will also depend on the political and economic situation both in Russia and worldwide. The development of the local market for oil and refined products will also affect the process. Overall, the process is not a fast one, with risks being high and, therefore, estimating the time it would take to begin trading in rubles is impossible. Related: Did Italy And Malta Actually Agree To Swap Oil Rights For Refugees?
According to calculations of various international agencies, Urals and ESPO deliveries are double of those for Brent, Oman and Dubai brands. “Deliveries of Urals thorough the ports of Primorsk, Novorossiysk and Ust-Luga exceed 2 million barrels daily and the Druzhba (Friendship) pipeline adds another million barrels,” said Mikhail. “The ESPO brand is exported at 600,000 barrels a day. At the same time, volumes of Brent are depleting and additions of new brands only erodes the benchmark.” Due to drying out of the North Sea reserves, the Brent benchmark is no longer the dominant brand, making the premise of the new Urals benchmark formation all the more prominent.
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“However, the ESPO brand possesses far more potential to substitute Brent as the new benchmark, as its deliveries are orientated towards Asia and it is closer to Brent in terms of quality. ESPO could become the benchmark of the Asian market, provided that its exported volumes will be increasing,” concludes Andrey Kochetkov.
By Donald Levit via Economicccalendar.com
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