An increasing flow of Middle East crude to Europe has forced Russia’s Urals to fight for its place on the market. The Russian grade has dropped in price but managed to preserve its position in the region as one of the most popular.

Urals differentials have been surprisingly stable since the end of 2015, despite negative events, such as seasonal refinery turnarounds, resumed loadings from Iran and the start of Arabian and Iraqi supplies to northwest Europe, which would be expected to affect prices.

A small change in the market situation would have made Urals differentials jump a year ago, by as much as $1-1.50 a barrel against BFOE in a week’s time, but this year the changes are only 40-50 cents and lower. The maximum change in differentials this year has been 70-80 cents, but there have been no more than three such cases, Reuters data shows.

“Urals differentials are kind of stuck at one figure and don’t move away from it whatever happens,” one trader said.

NEW RULES

The increase in Middle-Eastern and West African exports to Europe in 2015 happened at the same time as crude oil exports increased from Russia, due to rising production and lower margins on local refineries after the fall of crude prices. The surplus of supply in Europe forced sellers to fight for buyers.

The new supply-demand balance changed market rules: trading firms used to be the market makers as they could easily understand refiners’ need and sell cargo with a significant premium, but now most refiners in Europe have a wide choice of different grades, which they use as a strong point in negotiations with sellers.

“Of course, I prefer Urals, but if a seller gives me some unreasonable prices I look at Iraq, Iran, Arabian grades,” said a big European refiner.

As a result European refiners are more fussy and buy crude at what they consider a fair price. Urals has also found its fair price these days, traders say, meaning Urals differentials has less volatility.

“When the market understood that there was a surplus supply of crude oil, Urals differentials fell, but after they hit the bottom, they strengthened to new levels and have remained there for a half year,” one of the major Russian crude oil market players said.

SEASON OF DISCOUNTS

Fierce competition between Urals and alternative grades on the European market weakened Urals discounts against BFOE. In January-May this year the discount for Urals cargoes of 80,000 tonnes, loading from Novorossiysk, averaged $1.65 a barrel to BFOE, which is twice as much as the average discount for the same period in 2015.

Discount for Urals cargoes, loading from Baltic ports in January-May, averaged $2.69 a barrel to BFOE this year compared with $1.64 a barrel last year over the same period.

“Urals differentials were very shaky in 2015, but they kept at a certain level. The news about Iran returning to the market at the end of the year brought them down” said one trader.

TRADERS ADAPT

Trading companies have also adapted to the new market reality, where it is difficult to earn money selling crude. Traders have become more cautious, hedging risks and using instruments such as contracts for difference (CFD).

“In the market we have to hedge our risks a lot, look at new regions,” one trader said, “We negotiate for months. In one place we lose, in the other, we win.”

The new market reality made arbitrage more feasible on the Urals market and the Russian grade was shipped to USA for the first time in five years in 2016.

Lower volatility on the Urals market made trading houses’ margins shrink and gave refiners more possibilities to negotiate prices.

“The situation is quite complicated for us: sellers still remember the old price levels and buyers see the variety of available grades and don’t want to pay any more,” said one trading source said.

URALS STILL IN DEMAND

Demand for Urals is still one of the highest in Europe even with the influx of new alternative grades, traders said. Lower volatility in Urals differentials shows that refiners are keen to buy Russian grade at the current levels and that prices are unlikely to drop sooner.

“Urals is a great product to sell. One thing they say about Russia in Europe: they produced, they produce, they will produce. This stability counts for lot” said a big European trader.