In July, the cost of Urals exceeded the sanctions ceiling

In July, the cap imposed by the West on Russian oil prices did not work – for the first time since the start of sanctions, the average monthly price of Urals exceeded $60 per barrel. This was the result of a reduction in the supply of oil from Saudi Arabia and Russia, as well as cheaper freight to Asia. It remains unclear whether there are still effective measures in the arsenal of the US and EU countries to maintain the ceiling in the current market situation, given that most of the oil is now transported without the participation of Western companies.

The average price of Urals oil in July was $64.4 per barrel, follows from monitoring data Ministry of Finance on the basis of quotations of the international pricing agency Argus. Thus, the cost of the main grade of Russian oil for the first time for a long time exceeded the level of the oil price ceiling, which the EU and G7 countries began to apply from December 5, 2022.

The cap price of $60 per barrel for shipment from Russian ports (FOB) was introduced by the EU, the US and their allies in response to the fact that the Russian Federation began hostilities in Ukraine. As conceived by the EU, shipowners and insurers should not transport and insure tankers with Russian oil if it is sold at a price above the ceiling. The measure, coupled with the EU embargo, was aimed at reducing export revenues that the Russian Federation receives from the sale of crude oil. Immediately after the introduction of the price ceiling, the cost of Urals fell sharply, and the discount to Brent increased to $40 per barrel, but gradually during 2023 the discount began to decrease and in July it was already $15 per barrel. At the same time, the average cost of Urals in January-July amounted to about $54 per barrel, which is below the established ceiling.

At the beginning of last year, Russian oil companies began to redirect Urals volumes to Asia and build up a fleet of tankers for this, which meant more expensive logistics. Sanction pressure and lack of transparency in pricing (caused by the fact that the previous estimates of Urals quotes were entirely based on the European market, where it almost ceased to be supplied) led to inflating the discount to Brent. To combat this, the Ministry of Finance revised the methodology for determining the price of oil for calculating taxes in the spring, introducing a fixed maximum discount for Urals to Brent – from September it will be $20 per barrel.

The current growth of Urals quotes is associated with the joint efforts of Saudi Arabia and Russia to reduce oil supplies to the world market during the summer.

Thus, in July and August, Saudi Arabia voluntarily reduced oil production by 1 million barrels per day, and Russia will reduce exports by 500,000 barrels per day (see chart). “Kommersant” dated July 17). The shortage of medium-sulfur oil produced by Saudi Arabia and Russia in the world market leads not only to an increase in Brent quotations, but also to a reduction in the price difference between medium-sulfur and low-sulphur varieties, which contributes to the increase in the price of Urals.

Urals has been trading above the ceiling for several months as the FOB quote lost its relevance after the imposition of sanctions and the loss of the European market, explains Kpler’s Victor Katona. Now, according to him, when Russian oil companies negotiate with Indian oil buyers, the price of oil is calculated on the basis of DES (delivered ex ship, delivery from the vessel at the buyer’s port), that is, the exporter assumes all the costs associated with the freight. So, for almost the entire 2023, Urals, when delivered on DES terms to India, was traded at a discount of no more than $10 per barrel to Brent, while the price of Brent did not fall below $70 per barrel, and in July exceeded $80.

The cost of Urals on FOB exceeded $60 per barrel, primarily due to lower freight prices, an increase in oil prices, a decrease in Urals supply due to the announced reduction in exports, the expert believes. Mr. Katona estimates that the cost of freight is now around $5-6 per barrel, with the price of Russian oil in India at $75 per barrel – thus, “it is difficult to continue to pretend that Urals is trading within the ceiling.”

Dmitry Kozlov