DAILY ENERGY REPORT

Urals prices and the price cap, Saudi, Russia, and Algerian oil production cuts, Aramco OSP, India’s refiners pay for Russian oil in Chinese yuan, and more

CHART OF THE DAY: Urals Prices to Brent. What are the Implications? 

Summary:

Figure (1) above shows the Urals and Brent prices in the first half of 2023 compared to their prices in the first half of 2022.  Urals prices declined by 38% while Brent declined by only 24%.  Most of the difference between Brent and Urals (14%) is what is known as the “Russian Discount”.

EOA’s Main Takeaway:

Urals prices declined by 38% of which about 24% related to general price decline.  What about the difference of 14%?  It is mostly the difference in shipping costs between Europe and Asia.  There is a small discount intended to entice Asian buyers to buy Russian crude.

• Average price of Urals crude declined to $52.15/b in the first 6 months of 2023 from $84.09/b for the same period in 2022.

• The Average price of Urals was $55.28/b in June 2023. It was $87.25 in June 2022.

• Brent averaged $74.71 in June 2023.

• Russia’s budget was based on a price of $80/b in 2022 and declined to $65/b by 2025 (They have a three-year plan).

This symmetry of the decline in prices proves the point that the reduction in Russian crude prices has nothing to do with the price cap. The difference in the decline in Urals vs the decline in Brent is about $6 which is roughly the equivalent of the difference in shipping cost between Europe and Asia.

It is clear that oil prices of today are lower than the prices assumed in the budgets.  But these prices are meaningless to the oil market.  In general, governments of oil–producing countries are flexible. They can borrow from domestic markets and abroad.  They can cut spending and delay or cancel projects. They can reduce subsidies and, in some cases, increases taxes and fees.

STORY OF THE DAY: Saudi Arabia, Russia, and Algeria’s Oil Production Cut

SAUDI MINISTRY OF ENERGY: Saudi Arabia will extend the voluntary cut of one million barrels per day for another month to include August

TASS: Russia to voluntarily cut oil exports by 500,000 bpd in August — Novak

REUTERS: Saudi Arabia and Russia deepen oil cuts, sending prices higher

BLOOBERG: Saudis, Russia, and Algeria Extend Oil Supply Cuts to Prop Up Market

TASS: Growth of oil prices speeds up amid statements by Novak, Saudi Arabia

Summary:

Saudi Arabia, Russia, and Algeria announced today they were going to deepen their oil production cuts, triggering a rise in oil prices despite concerns over global economic activity.

The Saudi Press Agency (SPA) quoted a source from Saudi Arabia’s Ministry of Energy as saying that the Kingdom will extend its voluntary cut of 1 million barrels per day (MMB/D)—that went into effect in July 2023—for another month to include August. The cut could be extended at a later date.

“In effect, the Kingdom’s production for the month of August 2023 will be approximately 9 million barrels per day,” the official source said.

Meanwhile, Russia’s Deputy Prime Minister, Alexander Novak, said Moscow will “voluntarily reduce its oil supply by 500,000 barrels per day, by cutting its exports to global markets by that amount,” according to an official statement.

EOA’s Main Takeaway:

As we told our readers more than a week ago, Saudis will extend the cut to August.  It is clear that the Saudi and Russian cuts are coordinated.  The Algerian decision to join indicates other OPEC+ members may announce additional cuts, too.

While Saudi Arabia will cut production, Russia will cut exports.  We believe the Russian government is under tremendous pressure from Saudi Arabia to show a cut that is transparent, visible, and measurable.  Certain private companies are monitoring Russian exports. Russia will try to demonstrate the validity of its cuts through pipelines or ports that are more reliable in measuring the quantity of the flow of liquid products.

The Saudi and Russian cuts for August are at odds with OPEC’s bullish view exhibited in its monthly report.

NEWS OF THE DAY

1-      QCI: Dubai/Urals crude spread narrows to below $20/b in June

Summary:

Quantum Commodity Intelligence reported today that “The spread between Russia's flagship Urals crude and the Middle East Dubai benchmark has narrowed to the lowest level since the re-routing of Russian crude to Asia after Moscow invaded Ukraine.”

The report also stated, “This puts the Dubai/Urals spread at $19.69/b on a FOB basis last month versus $21.59/b in May, the first time the spread has been below $20/b since the price cap was introduced in December. As recently as February, Dubai/Urals was above $30/b.”

EOA’s Main Takeaway: