Several key European customers of Russian medium sour Urals have been making steady progress towards co-processing renewables along with crude supplies at their refineries.
In this episode of The Crude Report, Argus Crude Editor Michael Carolan and Crude Reporter Felix Todd discuss just how much of a concern this trend is for sellers of Urals in northwest Europe, at a time when pressure from competing North Sea and long-haul US grades is starting to tell.
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Michael: Hello, and welcome to the latest edition of "The Crude Report." This is a weekly podcast from Argus Media in which we look at some of the big issues facing global crude markets today. My name is Michael Carolan and I edit "The Argus Crude Report" here in London. And I'm very pleased today to welcome my colleague, Felix Todd, who covers the Russian and Caspian crude markets here at Argus.
Felix: Hi, Michael. Good to be here.
Michael: Good to have you with us. So, Felix, you've been looking at developments in the market for Russian Urals crude and in particular, European buyers of the crude. Now Finland's Neste Oil, who I understand has historically been a big Urals buyer, they've been vocal lately about moving towards renewable energy. Presumably, it's not the only one. Is this a concern for Urals sellers in the long term?
Felix: In the long term, it would appear so, yeah, for sure. But there are also some concerns in the short term as well. So Finland is aiming to have renewables account for more than half its energy consumption by 2030. But more specifically, Neste is changing its Porvoo refinery, which has always been one of the biggest outlets for Urals crude in Finland and just one of the biggest in Europe generally, to co-process crude and renewable feedstock.
So if you compare Urals delivery to over the first quarter of this year with last year's first quarter, you can already see the impact that it's having. Urals' shipments dropped by around 22% quarter on quarter to just under 190,000 barrels a day. Since then, Neste's other refinery, Naantali, slows down. Porvoo has actually been switched offline for second-quarter maintenance. Neste is expected to return to the markets taking Urals cargoes for sort of early July arrival at Porvoo. But all the figures we have suggest its intake will decline from here on out.
And like you say, Neste isn't the only one. Another example is Total's Grandpuits refinery just outside Paris. Urals used to flow fairly regularly into Le Havre, which is connected to Grandpuits via pipeline. But shipments ground to a halt this year because the facility is also being converted into a bio-refinery. So around five cargoes were delivered to Le Havre over January-March last year for an average of roughly 35,000 barrels a day, but just one has been sent this year back at the end of March. So yeah, overall, it seems like quite a concerning trend for sellers that are gonna place cargoes Northwest Europe, both in the short term and the long term.
Michael: Okay, and how about competition from other grades? Apart from contending with this move towards renewables, how are Urals sellers fairing when it comes to pressure from competing crudes in the region?
Felix: Yeah, there's certainly pressure particularly from the North Sea. Preem, the Swedish refiner is a good example. Like Neste, it was traditionally a staple Urals outlet in Northwest Europe. Its overall crude intake at its Lysekil refinery at Brofjorden has declined of late as it's also converting the facility to co-process crude renewables. But even its somewhat truncated appetite for crude has been largely catered to by North Sea options rather than Urals over the past couple of years.
Again, just looking at the data, Ural shipments to Brofjorden are down 50% on the year in the first quarter and down by almost 90% against the first quarter of 2019. In the meantime, shipments of Norwegian Gullfaks [inaudible 00:03:09] which has been a key Urals competitor since they began producing back in late 2019, they've risen by about 31% on the year.
Michael: Okay. Interesting. Lots have been made of the pressure new European crudes are under from arbitrage cargoes of U.S. crude arriving in [inaudible 00:03:25]. And they are, of course, very different in quality. But does WTI pose a threat to Urals despite being a light sweet grade where Urals is medium sour?
Felix: Not a direct threat, no. But when the Urals price is high, refiners always have the option of blending a relatively cheap cargo of WTI with a heavy sour Middle East Gulf grade. This is typically Arab heavy or Kiurkuk. And by doing that, they can effectively make a synthetic Urals blend. So we frequently see WTI cargoes arriving in Lithuania or Denmark, key Urals markets, most likely for this reason. So even if it doesn't directly compete with Urals, WTI can still displace the Russian crude in its own markets.
Michael: Okay. And how about farther afield, OPEC Plus, we understand, this year is planning to unwind its production cuts which will potentially flood Asia-Pacific with Middle East Gulf supplies, and particularly, if we see a return of Iranian barrels, of course. Is this a concern for Urals sellers targeting the long-haul market?
Felix: It's definitely something to consider, but I doubt this will be anywhere near as much of a concern as what's going on in Europe. Back when the cuts were first introduced, some Northeast Asian countries, which typically use Middle East Gulf crude as their base low grades, bought from arbitrage Urals suppliers. But for Urals, the key to the Asia-Pacific market is and has always been China. The consensus seems to be that if Chinese demand returns to pre-pandemic levels, there's gonna be enough for everybody.
Delivered Rotterdam Urals differentials have actually received a lot of support from a fairly sharp uptick in Chinese demand over the past few weeks. About three May-loading bulk shipments were booked for delivery to China. The same number was loaded over the entirety of January to April. So these bulk shipments travelling outside the region is definitely having a positive impact on Urals' prices. So I guess in that sense, it's really just a race between time between the OPEC production cuts unwinding and Chinese demand getting back to baseline, which it appears to be doing already.
Felix: Excellent. Well, and thank you very much for that, Felix. That was most informative. Now you can find further insights from Felix on a daily basis in the Russia-Caspian section of "Argus Crude," where you'll also find our price assessments for Russian Urals crude as well as for Azeri and Caspian grades. You can find more information on this service at www.argusmedia.com. So thanks very much again, Felix. And thank you for listening to "The Argus Crude Report." We look forward to you joining us at the next episode of "The Crude Report."