There’s a tragic irony in the fact that Russia is suffering the biggest capital flight in years on fears of what declining oil prices will do to its budget – at a time when the demand for its sour crude is soaring.
The context for this is that the discount in price of Russian (sour) crude versus that of light sweet dated Brent hit a seven-year low in November. The narrowing of the spread between dated brent and Russian crude is indicative of the rising demand for the sour product.
Note chart below of Urals vs Dated Brent from Energy Intelligence’s Nefte Compass:
Refineries are after the Russian sour crude because maximising gasoline output is no longer a prime objective because of the negative gasoline crack spread. Russian urals crude, unlike the lighter and sweeter crudes WTI and Brent, is good for maximising feedstocks and distillate production. Those products are currently propping up the whole refinery complex, according to traders.
The differential widened after Russia slashed its oil export duty last week. But even trading at a discount of $1.80 per barrel today versus a high of 43-cent per barrel earlier this month still leaves urals at yearly highs versus Brent. The softening comes on expectations that producers who had been holding back exports on profitability grounds will return to the market at large next month.
As can be seen from the European Med margins above, cracking Urals currently generates the best returns for Mediterranean refineries. Alas, this is unlikely to save the Russian budget next year (or European refiners for that matter). Russian Finance Minister Alexei Kudrin today forecast average oil prices of $50 next year, no less than $45 below the level budgeted for in 2009.
And while an imminent boost of Russian supplies set from December 1st will be welcomed by refiners, it certainly won’t be enough to pull them into profits or backtrack on runs already suspended for profitability’s sake.
The stress for independent refiners like Switzerland’s Petroplus is evidently clear. The group, which is Europe’s largest refiner, reported a Q3 loss of $445.6m last week, twice as big as analysts had expected. It has also announced a cut in runs at its Teesside refinery. No surprise, shares over the last few months have been smashed accordingly (see below Petroplus vs BP, FTSE and below that vs SMI).
