MOSCOW (Reuters) - China is buying a record 1.6 million tonnes of Russian oil for loading at sea over the next four weeks, taking advantage of rock bottom prices for Russia’s flagship Urals grade combined with a collapse in demand in Europe, traders said on Wednesday.
The volumes make for a new monthly record of Urals supply to China after they surpassed 1.2 million tonnes in January.
They also provide a lifeline to Russian firms as they struggle to sell oil in Europe because the coronavirus has led to a deep fall in demand. At the same time, rival Saudi Arabia has pledged to flood customers with crude in a market share battle with Russia.
The deliveries could also indicate China is using the collapse in oil prices to fill its strategic reserves.
Analysts from Wood Mackenzie estimate China’s strategic and commercial petroleum reserves could reach 1.15 billion barrels in 2020, equivalent to 83 days of oil demand, up from 900 million in 2019 and just 200 million barrels in 2014.
Three traders in the Urals market said China’s Unipec purchased some 800,000 tonnes of Urals loading from Baltic ports in the second half of March and some 500,000 tonnes of Urals loading in early April.
The company will offload cargoes into supertankers or very large crude carries (VLCCs) at Denmark’s Skaw ship-to-ship terminal and send them to China.
So far, it has lined up three VLCCs scheduled to reach China between mid-May and early June, traders said.
Shell also booked a VLCC to ship 300,000 tonnes of Urals to China for loading in the first half of April, two traders said.
Unipec’s parent company Sinopec did not respond to a request for comment. Royal Dutch Shell said it does not comment on trading activity.
The sources, speaking on condition of anonymity, said several other Chinese refiners have also placed requests for Urals. They declined to name potential buyers because of confidentiality clauses.
Traders said Urals became attractive in Asia after European benchmark Brent fell to its widest discount yet to Dubai of more than $4.50 per barrel.
Urals is priced off Brent, while competing Middle Eastern grades in Asia tend to be priced off Dubai.
“It’s a great deal now even if you have to pay a lot for transport,” a trader in the European market said. Urals cargoes loading from Baltic ports are trading at a discount of $3.50-$4.00 per barrel to dated Brent.
“It is tough to sell Urals in Europe now... and China is a desirable destination,” a trader in the Urals market said.
Urals’ deliveries to China take up to two months and the long journey is economic when forward prices are higher than prompt prices, a market structure known as contango.
“If you have long delivery period, it’s easier to choose more profitable pricing,” a trader in the Urals market said.
Two traders also said demand for Urals among Chinese refiners was boosted by resilient diesel and fuel oil cracks, which have been hit less than gasoline and jet kerosene.
“Margins are not good, but diesel is more or less fine and is expected to recover towards the summer season,” a trader supplying to Chinese refiners said.
Additional reporting by Aizhu Chen in Singapore; editing by Dmitry Zhdannikov, Jason Neely and Barbara Lewis