Iranian oil sanctions trigger Urals price jump

What does an oil refinery do when it loses its supply of Iranian crude? A contract for Saudi Arabian oil is probably the best replacement, over the medium term. But in a rush, little beats a few barrels of Urals, the Russian main export oil stream.

The scramble for Urals – a low quality, high sulphur crude produced in central Russia – shows the impact in the physical oil market of European and US sanctions on Iran. It helps to explain, too, the recent recovery in oil prices back to about $100 a barrel despite weakening global economic growth.

Since the sanctions against Iran came into force on July 1, refiners that waited until the last minute to cut all their links with Iran, including Eni of Italy and Tupras of Turkey, have rushed into the Urals market, triggering a price jump.

“While some of the lost Iranian barrels will surely be covered by Iraqi and Saudi term volumes, Urals should remain the go-to grade for regional refiners,” says Johannes Benigni of oil consultancy JBC Energy.

Oil traders and refining executives say that Urals largely mirrors the quality of Iranian crude. Besides, it is widely available in the spot market, making it an ideal replacement.

“People need to replace the last barrels of Iranian oil,” says a Europe-based trading executive at a major oil company. “And Urals has been largely the answer.”

Nonetheless, some European refiners – including Repsol and Cepsa of Spain – have also bought extra Iraqi barrels as a replacement to Iranian crude.

The International Energy Agency, the western countries’ oil watchdog, estimates European refiners bought about 450,000 barrels a day of Iraqi Basrah crude in May, the latest data available, up from an average of 100,000 b/d earlier in the year.

The EU sanctions are the biggest reason behind the drop in Iranian exports. First, European countries can no longer import
Iranian crude from July 1, forcing the last holdouts, such as Eni of Italy and Hellenic of Greece, to stop buying.

Second, an EU insurance ban on tankers transporting Iranian crude has also forced other countries, including Turkey, to reduce imports substantially.

Oil traders and consultants who monitor Iranian crude oil production estimate that the country’s oil exports have fallen already to about 1.3m b/d, down from 2.1m b/d on average last year, and will hit 1.1m b/d by the end of the month.

The loss of supply is approaching the levels seen last year during the Libyan civil war, analysts say. “The full scale of the Iranian sanctions is yet to be fully appreciated by the market,” says James Zhang, oil analyst at Standard Bank in London.

The dash for Urals mimics a similar move earlier this year.

When the European and US sanctions against Iran were first mooted in January-February, refiners such as Total of France and Repsol of Spain also rushed to buy Urals as they severed links with Iran months ahead of the implementation of the restrictions.

The Russian crude is now trading at a hefty premium of 52 cents per barrel over Brent, having swung from a discount of as much as $1.60 per barrel in mid-June.

Hussein Allidina, head of commodities research at Morgan Stanley in New York, says that the surge in the Brent-Urals price differential “likely reflects less Iranian crude available to the market”. Indeed, the premium of Urals over Brent is closing in on the record of 65 cents seen in February. This is only the second time Urals has traded at a premium to Brent in the past decade, the first being the December-February period amid talk about the sanctions against Iran.

The jump in Urals prices has, in turn, shored up the price of other grades, including Brent.

Iran has not been the only factor supporting Brent. A strike in Norway, recent disruption to Libyan exports and seasonally higher demand had also helped.

Brent crude for immediate delivery yesterday rose to $99.38 a barrel, up from an 18-month low of $88.49 a barrel last month. Brent hit a two-year high of $128.40 a barrel in early March supported by the concerns surrounding Iranian exports.