Russia Benefiting from Oil Market Turmoil

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

An interesting couple of posts from Southfront.org this week gives us some insight as to what’s happening in international oil markets.

Demand for Russian Urals grade oil is so strong that is has been trading at a pretty steep premium to Brent Crude this month. Southfront references this report from Argus research.

This means that the Russian Urals crude is trading at a premium to the European benchmark Brent. The premium is $1.55 per barrel in North-Western Europe and $2.55 – in the Mediterranean.

Argus names competition as the reason of Urals reaching such a high price. After the United States imposed sanctions against Venezuelan oil, American refineries began to willingly buy Russian heavy oil, very similar to the one exported by the Venezuelan PDVSA. In addition, demand for Russian oil in Asia is growing.

Traditionally, Urals trades at a discount to Brent because of a lack of a unified benchmark price for it. The July Shanghai Crude Oil futures contract closed at ¥299 (or $42.30) per barrel this week, putting it at a ~$1.70 premium to Brent Crude.

Russian Urals is far closer to the Medium Sour oil the Shanghai contract represents than the Light Sweet Brent.

At the same time the Saudi Arabian plan to flood the market with oil to gain market share has failed entirely.

Despite record oil exports in April as Saudi Arabia flooded the market with oil, the value of the Kingdom’s crude exports plunged by US$12 billion from April 2019 levels as the lowest oil prices in years hit revenues.

In April, the value of Saudi Arabia’s oil exports plummeted by 65.4%, or US$12 billion (45.3 billion Saudi riyals), severely affecting the value of the total exports of the world’s top oil exporter, data from Saudi Arabia’s General Authority of Statistics showed on Thursday.

China was Saudi Arabia’s main trading partner for merchandise trade in April 2020, with Saudi exports to China valued at US$1.9 billion (7.16 billion riyals).

The Saudis flooded the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, according to data from the Joint Organisations Data Initiative (JODI).

They shipped out 50% more oil and revenues plunged by 65%. They practically gave the stuff away in April. They had to. With the Riyal tied to the dollar they had to undercut Russian oil which trades in freely-floated rubles.

In March and April the ruble spiked to a high of RUB81.66 per dollar and has steadily fallen since then. Today it is still trading around 5% weaker against the U.S. dollar than it was pre-crisis.

That then becomes an even bigger source of profit given that now Urals grade is trading at a premium to Brent Crude while U.S. exports continue to lag behind.

And the Saudis are now still price takers rather than price makers since they immediately had to go back and adhere to production cuts in like with the rest of OPEC+’s agreement.

This dynamic highlights a couple of interesting points:

1. Russia has emerged as a more trusted partner overall than Saudi Arabia in the Eurasian oil market. Europe is willing to pay a premium for Urals because of both reliability and pricing advantages when currency fluctuations are considered.

2. China is willing to be a big buyer of Saudi oil while it eschews U.S. imports in order to gain leverage over Saudi policy. As their biggest customer China will at some point dictate terms rather than be dictated to.

3. Subtle shifts in the supply chain by major importers could also be a leading indicator of political unrest in the Arabian peninsula. The Saudi economy is in shambles and the Southfront report notes significant layoffs at Saudi Aramco.

I’ve been steadfast in my assessment that Russia holds all the cards in the global oil market at this point. This position will only strengthen as long as oil prices stay in this price range.

And don’t think Iran isn’t okay with this pricing regime since it thoroughly undermines the Saudis, which, in turn, exposes Israel’s soft underbelly. Iran is using the turmoil in the U.S. to, effectively, smuggle oil around the world, including to China.

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