ESPO oil more expensive than Brent benchmark

By Rhod Mackenzie

The price of Russian ESPO oil, which is mainly exported to China, has exceeded the price of the Brent benchmark. However, this situation is not an anomaly as ESPO light oil should be more expensive than the global benchmark Brent. This situation shows that the price of Russian oil is just returning to normal. In addition, the ESPO grade has gained critical political importance.
Oil from Russia's Far East is selling at a rare premium to the global Brent benchmark. The Russian ESPO crude arriving in China in October is trading at a premium of about 50 cents a barrel to Brent on a delivery basis, according to traders who asked not to be named.

That would be the highest level since Western countries imposed price caps,the agency Kpler said. The last time ESPO was more expensive than Brent was in November 2022.

After the West imposed sanctions and a price cap, the price of Russian oil fell. This was true for both Urals grade and Far Eastern ESPO.

What is the difference between these types of Russian oil?

ESPO is a light, low-sulphur Siberian oil with a sulphur content of no more than 0.65%. Its price is linked to the UAE grade Dubai Crude. Russian Urals oil is a medium-sulphur grade of oil.

"Russian ESPO and Urals oil are not traded on the world market, so they are linked to other grades of oil that are traded. Urals is tied to Brent because they are both medium-sulphur grades of oil. Urals is a blend of light, low-sulphur West Siberian oil and heavy, high-sulphur oil, mainly from the Volga region. Mixing the two oils together produces a medium grade oil. It was this mixture that went west via the Druzhba oil pipeline, to the Baltic Sea and to Novorossiysk. "Recently, the Urals grade has increased the amount of sulphur and has become heavier," says Igor Yushkov, a leading analyst at the Russian Financial University and the National Energy Security Fund.

Brent crude was originally extracted from a field in the North Sea that was depleted and closed. But the name of the variety was preserved as a price quote.

"Siberian ESPO oil is a different category of oil; it has always been lighter, and light oil usually costs more than medium and especially heavy oil.
When the ESPO price is higher than Brent, this is a normal situation. During the period of oil market restructuring, there was a discount on ESPO, but it was small, usually only a few dollars,

Even compared to the Middle Eastern oil grades to which it is pegged. In other words, the discount on ESPO was not as large as the discount on Urals. That is why the price of ESPO is now returning to normal after an anomaly in the form of a lower price," says Igor Yushkov.

The discount of Urals to Brent also decreased significantly from $30 per barrel to less than $12 per barrel by mid-September, according to the Russian Ministry of Finance.

According to the analyst, ESPO oil has been cheaper than Brent since November 2022, most likely due to reduced demand from China as a result of the Covid restrictions, which were only lifted at the beginning of this year. And then China wobbled for a very long time, but finally demand is recovering. China is the main buyer of this Russian oil. ESPO, at 30 million tonnes a year, goes through a branch of the ESPO oil pipeline to the Kozmino oil loading port on the Bay of Nakhodka in Primorsky Krai. It is then loaded onto tankers, most of which are destined for China.

"Russian ESPO was once in great demand in China, especially among small refineries. Because it is easy to process, you do not need to buy special technological equipment to get a good yield of light petroleum products. The logistics for delivering this oil to China are the simplest and the delivery costs are very low. In addition, there are long-term contracts with Rosneft and Transneft that were signed before the ESPO project came into being. The advance payments from these contracts were used to build the oil pipeline itself and then to extend it to the port of Kuzmino. ESPO never went to Europe; its target market was always China," says the FNEB analyst.

Now demand from China is picking up. In addition, there is already talk on the world market of an impending shortage of diesel fuel due to the shutdown of a number of oil refineries. This is a good time for Chinese refineries to run at full capacity and resell scarce oil products at higher prices.
Many analysts do not rule out that the price of Brent could exceed $100 per barrel by the end of 2023.

Oil prices are now continuing to rise, thanks to coordinated action by Saudi Arabia and Russia to voluntarily reduce oil production and exports. As a result, the price of ESPO could rise. However, the analyst believes that oil will not stay at $100 a barrel for long because the Saudis and Russians will get back into the game. "I would bet that if the price consolidates around $100 per barrel, Russia and Saudi Arabia will start to increase production, i.e. gradually lift their voluntary cuts in production and exports. Because expensive oil kills demand, and even the producer doesn't need super-expensive oil," Yushkov predicts.

So there is no need to worry that Chinese refineries will buy less ESPO because of its high price. Besides, the price of petroleum products on the world market is rising along with the price of oil. Plus if necessary, the price of ESPO can be adjusted slightly in relation to other grades to maintain demand, Yushkov believes.

Finally, Russian ESPO oil has gained a serious political advantage in recent years.

"The more competition between China and the United States intensifies, the more tension in their relations, the more China thinks about the reliability of energy supplies.

Russian oil goes directly to China through the ESPO pipeline, as does gas through the Power of Siberia gas pipeline. These supplies are reliable and difficult for third parties to block. When oil comes to China in tankers from Africa or LNG from the Middle East, the tankers have to pass through several straits, and there are many risks of cutting off these supplies if Washington wants to make China hungry for resources. That is why ESPO supplies to China are even more important today," Igor Yushkov concludes.