MOSCOW (Reuters) - Urals differentials have fallen to the widest discounts against dated Brent crude in a year as refiners start switching to low-sulphur grades in the face of coming IMO 2020 regulations.
The International Maritime Organization (IMO) will from January require shippers to reduce the sulphur content of fuels used in their vessels. To produce low-sulphur maritime fuel, refiners have to switch to sweet grades.
Urals crude oil has a sulphur content of about 1.6-1.8%, while the IMO 2020 regulations will allow a maximum 0.5% in marine fuel.
“It’s a new trend: we’ll need less sour soon, so we buy less Urals and pay less for it,” a source at a trading company said.
On Sept. 27, Urals differentials widened to minus $2.85 per barrel - the weakest level since October 2018. The discount for Urals loading from Baltic ports has been around minus $2 per barrel since the end of September, Refinitiv Eikon data shows.
The average discount for Urals crude ex-Baltic in 2019 to date was $0.73 per barrel, according to Refinitiv Eikon data. In September, the average discount to dated Brent widened to $1.90 per barrel. BFO-URL-NWE
In the Mediterranean, Urals crude has been doing better this year with an average premium of $0.87 per barrel for 80,000-tonne cargoes. At the end of September, though, the differential eased to below dated Brent minus $1 a barrel. BFO-URL-E
Urals differentials would have been wider, traders said, had supplies from Venezuela and Iran not been curtailed this year by U.S. sanctions, creating a deficit of sour grades in the market.
“IMO 2020 is being felt in the Urals market, but not that much so far because of a shortage of sour crude globally that supports Asian demand (for Urals),” a trader with an international trading firm said.
Urals arbitrage to Asia has been rising since August with China’s Unipec taking up to 1 million tonnes of Russian grades, according to shipping data and traders.
High sulphur content in Urals crude is a major issue for European refiners in light of IMO 2020 as its refining margins may drop significantly due to weak high-sulphur fuel oil (HSFO, 380 cst) prices.
When refined, Urals gives a high yield of HSFO, which is becoming much cheaper as its usage after IMO 2020 will be limited.
According to Refinitiv Eikon data, Urals crude gives some 28% of fuel oil with a sulphur content of 2.8-3.5% in “complex” Mediterranean refineries. In comparison, Brent Blend gives some 19% of fuel oil with 0.7-1% sulphur content. <REF/MARGIN3>
HSFO was trading at a discount of around $250 per tonne to low-sulphur fuel oil (LSFO, 0.5%) as of Friday.
For 2020, HSFO is seen trading at a $200-250 per tonne discount to LSFO, Refinitiv Eikon terminals show.
European refineries have started to change their diet recently as they produce LSFO in readiness for 2020, traders said.
For instance, Urals supplies to Poland’s port of Gdansk have dried out to just a couple of cargoes per month since July compared with four to six on average last year, Refinitiv Eikon shows.
Polish refineries have increased their purchases of seaborne sweet West African, U.S. and Saudi grades instead.
“The process has been a bit slower than expected. But now that there are just a few months until IMO, refiners understand it’s time for a change,” a trader with a European major said.
Urals crude has for years been a primary feedstock for European refineries, especially those near Russia, so switching to sweeter grades is complicated, traders say.
“Russian Urals crude is not going to disappear from our feedstock ... but we are changing some volumes to sweet grades to guarantee a higher yield of light products,” a trader at a European refinery told Reuters.
Reporting by Olga Yagova and Gleb Gorodyankin; Editing by Dale Hudson
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