The shunning of Russian Urals in Europe’s spot crude oil market has left a hole in supply, and also in price identification. To fill the gap, we have launched Argus Brent Sour – a new index that will help sellers and buyers agree price levels for heavier sourer grades.
In this edition of The Crude Report, Michael Carolan and James Gooder explain why this new index has arisen and how it works.
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James Gooder: Hello, and welcome back to "The Crude Report." This is a regular podcast from Argus Media in which we talk about goings-on in the world of crude oil trading. My name is James Gooder, I'm VP for crude at Argus, and I'm very pleased to welcome back to the podcast our global editor for crude, that's Michael Carolan.
Michael Carolan: Always happy to join, James.
James: Good to have you back. So this week, we're going to talk about a new index that we are publishing, so that sounds a bit like self-promotion, and it is. But we are trying to fill a gap in the market, and hopefully, we're going to be able to provide some useful information. So, let me tell you what it is, first of all. We're going to be publishing a new price in the Argus Crude Report called Brent Sour. Now, anybody who spent lockdown experimenting with cocktails will be familiar with the Pisco Sour and the Whisky Sour, and now Argus is launching the Brent Sour.
This is a new price index that is going to be used to assign a value, assign a price to medium and heavy sour crudes in Europe. And the simple reason is that since the beginning of the Russia-Ukraine conflict back in late February, Russian Urals crude has largely disappeared from the European spot market. Urals, of course, has been a mainstay in the European market for decades, and it's a key price reference for those selling crude of similar quality into Europe. So, Mideast Gulf exporters, the Saudis, the Kuwaitis, the Iraqis in particular, relied on a representative Urals price when calculating official selling prices for European customers. But Urals is not fulfilling that role anymore, so now there's really a clear demand for a replacement index, and that is what we are trying to provide with the Argus Brent Sour. But first of all, Michael, let's rewind a little. Give us a bit more colour, if you can, on what's been happening with Urals in recent weeks and months.
Michael: Sure. Well, like you said, since the Russia-Ukraine conflict began in February, the market has really lost Urals as a heavy sour marker in Europe. Urals prices quickly dropped below $30/bl discounts to Dated as European refiners just stopped buying spot barrels of Russian crude oil together. And they basically stayed there for three months. So in that time, the market had no real guide as to what non-Russian heavy crude was worth in Europe, and that's obviously caused problems with setting OSPs [official selling prices], as well as just getting a gauge of what the market is. Now, just recently, we started to get some visibility on Urals in Europe. Last week, we at Argus managed to gather enough information to move our Urals prices for the first time since early April. We have moved them a number of times since then.
James: So, we're starting to see some movement in the prices of Urals and perhaps a little bit more transparency, but the price is still steeply discounted to Dated, right? But do you think that this is a temporary blip that we are seeing with the Urals so heavily discounted? Or is this likely to be a more permanent or longer-lasting state of affairs?
Michael: Well, I think it's probably going to be long-lasting. The trouble is our Urals prices are prices for the crude delivered to Europe, and those flows have dropped sharply and will soon dry up completely. The price moves that we've made recently are based on flows more outside the region. Price discovery for Urals is basically moving to Asia, and this is likely to be a permanent feature of the market. Whatever price assessments are developed for Urals in the coming year - there probably will be some, whether they are delivered prices in India or China, I'd say, or assessments based at their origin in Russia - they will be driven by Asian refining economics, not those of Europe. So, Urals is unlikely to return to being a reliable marker for heavy or sour crude in Europe, again, at least not in the short to medium term, I'd say.
James: Yes, that sounds right. So, in the absence of a reliable European Urals price, as you say, we may find some prices in India that are more reflective, but in the absence of one in Europe, we're launching this Brent Sour index. But Brent isn't sour, it's not high sulphur crude. So, tell us a little bit about what this index consists of and where and when our subscribers will be able to find it.
Michael: Well, you're right, of course. Brent, like most of the North Sea's production, is sweet and light sweet at that. But there are sour barrels in the region, grades like Flotta Gold, Grane, and Johan Sverdrup. They might not be as sour as Urals, but they have a high enough sulphur level to behave in a different way to Brent, even Forties, of course, is a relatively sour grade. And we believe that combined they can provide a sour crude marker in the region with a level of liquidity that we hope can inspire some confidence.
Now, we're not looking to reinvent the wheel here, there is already a methodology for doing this with sweet crude in the region, that's called North Sea Dated or Dated Brent. Anyone familiar with the methodology for Dated will recognise the similarities with Argus Brent Sour. We've basically swapped out the sweeter grades in North Sea Dated, that's Oseberg, Ekofisk and Troll, and replaced them with Johan Sverdrup, Grane, and Flotta Gold. Forties and Brent will stay to offer some extra liquidity, as well as a price cap. But the Argus Brent Sour price will be set by the lowest grade in the basket, which is likely to be one of the sourer grades. And of course, by using North Sea Dated's existing methodology, we ensure that Argus Brent Sour also captures the market structure, reflecting the demand patterns we see in the prompt European crude market. We're planning to launch this price on the 1st of August, and we expect the index itself and its differential to North Sea Dated are going to become a useful tool for our subscribers worldwide.
James: So, we've done some analysis, looking at the history of how a price like this would have performed. And while Johan Sverdrup, you know, is likely to be the bedrock of this index, as you say, it's not exactly the same as Urals quality. But price-wise, it has followed a similar trend, is that fair to say?
James: Of what Urals did before everything changed?
Michael: Yes and no. But we're in a different world now. Last year, Johan Sverdrup was largely shipped to Asia, while Urals stayed in Europe. So, the price of the two crudes reflected the refining economics of their end-users, therefore they didn't move exactly in line. This year, of course, that has flipped, Johan Sverdrup is now used in Europe and not in Asia. So, we think it's sending a good price signal for Europe now that the Eastern arbitrage is basically closed. At Argus, we're always trying to improve our assessments, and we're hopeful that the liquidity and the transparency around Johan Sverdrup is going to grow now as this new trading pattern beds in. And that in turn should help Argus Brent Sour establish itself as a key pricing tool.
James: Yes. I guess all of that liquidity and all of that focus on Urals needs to switch to something else. There needs to be some kind of sweet-sour spread in Europe, and perhaps this will be the vehicle for that. Now, I mentioned earlier on, this price is likely to be useful to Mideast Gulf exporters who are seeking to calculate competitive official selling prices, and I expect it will also be useful to other producers of this type of crude, heavier, sour crude, that will be targeting Europe with greater volumes as Urals term contracts expire as this year goes on, and then eventually an embargo may come in. And there will be demand for replacement medium, heavy sour crude ramping up. But where is this crude likely to come from?
Michael: Well, you're right. I mean, we're already seeing greater volumes of West African crude coming to Europe, as it was squeezed out of its traditional markets in India and the rest of Asia by discounted Urals cargoes going into that region. We're also seeing more Brazilian and Latin American crudes coming to Europe to fill that gap, and this index will be useful for them too. And while a lot of these crudes are sweet, not all of them are, and the Brent price is perhaps not the best benchmark for them to use. We're hopeful that Argus Brent Sour, or ABS, will serve that purpose.
James: Excellent. Well, of course, as we've discussed on this pod many times, Brent itself is going to be changing in the not too distant future [with the addition of WTI to the Dated basket next year], so we could have what used to be a kind of Brent-Urals spread, represented by a WTI-Johan Sverdrup spread, or something like this. So, it's really amazing how this market has changed so completely so quickly. Let's wrap it up there, but thank you very much, Michael, for joining me again today. It's always a pleasure to talk this stuff over with you.
Michael: Yes, thank you.
James: We'll be following the performance of this new index with great interest. I hope our listeners and readers will be too. So, thanks, for explaining it to us. As Michael said, we're going to launch this in the Argus Crude report, the daily service, from the 1st of August. So, do have a look at it there, and we'll be very keen to hear any feedback and thoughts about this index and how it evolves. So keep an eye on it. Thanks for listening, and tune in next time for another edition of "The Crude Report."
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