Will Urals oil be able to replace Brent crude?

Will Urals oil be able to replace Brent crude?

Russia's Urals petroleum oil mix may soon become a price benchmark instead of the North Sea Brent crude oil mix, due to its significant drop in price. As a result, payments for Russian oil will be carried out in rubles, Russian media report.

The first Vice President of the St. Petersburg International Mercantile Exchange (SPIMEX), Mikhail Temnichenko, said that the exchange is now implementing a project to launch a contract for Urals and ESPO oil supplies (through the Eastern Siberia-Pacific Ocean oil pipeline). "There are plans to form a direct quotation on the export of oil on this basis and create a new price benchmark. The trading mechanism on the stock exchange will provide the necessary transparency and market confidence to create a benchmark," Gazeta.ru cited him as saying.

The project is being implemented by the Stock Exchange, the Ministry of Energy, the Federal Antimonopoly Service and the Central Bank, and supported by the presidential commission on the fuel and energy sector. It is expected that the process will be launched in the second half of the year.

According to Temnichenko, recently there were quite serious preconditions for a change of the external benchmark. In particular, the volume of Urals oil going through the ports of Primorsk, Ust-Luga and Novorossiysk exceeds 2 million barrels a day, through the Druzhba pipeline a million barrels flow every day. ESPO oil exports are about one million barrels per day.

Thus, the Russian economy could receive additional revenues due to the formation of direct quotations for domestic raw materials if the situation on the global oil market is unfavorable, Temnichenko added.

The president of the Union of Oil and Gas Producers of Russia, a member of the Council for Information and Cooperation of the Fuel and Energy Complex, Gennady Schmal, in an interview to Vestnik Kavkaza said that the fact that Urals oil is a mixture from different fields can interfere in the acquisition of benchmark status. "Therefore, ESPO oil has greater chances of receiving benchmark status," he suggested.

"It is probably necessary to have our own brand, but it is difficult to say whether it will be Urals or something else," the expert noted.

Schmal also pointed out that the current price of the Urals mix, which is often $1-2 below the price of Brent, is unfair. "In very rare cases Urals was slightly higher than Brent. As a rule, it is $1-2 per barrel cheaper, that is, $10-15 per ton," the member of the Council for Information and Cooperation of the Fuel and Energy Complex said.

A senior analyst of 'Uralsib Capital', Alexei Kokin, in his turn, said that the probability of obtaining benchmark status by Russian oil is low because, as a rule, a change of benchmark does not occur unnecessarily. "For the majority of market participants it is inconvenient to change the benchmark. It is theoretically possible that some Urals contracts will not be tied to Brent, but it is not clear then how in the absence of, for example, trading in the Urals contract, you can use it without reference to the Brent in long-term contracts," he explained.

"In principle, there are plans to run such instruments in Russia at the St. Petersburg Stock Exchange, but they still haven't been implemented. I do not see much demand for a new benchmark outside of certain Russian offices. Brent is preferable for everyone now. Accordingly, I think no one considers binding prices to Urals oil," the expert said.

Kokin said that, even if someone does, it is unlikely that prices for Urals would rise immediately. One could speak about the chance to get benchmark status if Russia suddenly enters the market with a new grade of oil, as it entered the Asia-Pacific market through the port of Kozmino.