Russian oil prices are equal to Brent grade

By Rhod Mackenzie

According to data from investment bank Goldman Sachs, the discount on the price of Russian oil to the Brent benchmark has decreased to nearly zero in recent weeks, after previously exceeding $30 per barrel. However, the discount on the purchase of the popular Russian Urals brand remains high at around $17, with the caveat that this only applies to Russian ports. At the same time, Urals costs $3 less in Indian ports, which is approximately the difference between Brent and Urals before the start of the CBO. So how did Russian oil managed to reduce the difference to a minimum and why the discount decreased to normal levels in India, while it remains high in Russia.

According to customs data cited by Goldman Sachs analysts, the price difference between Russian oil and Brent reached zero at the end of last year. The significant gap that existed in the first half of 2022 has been closed by non-G7 countries.

The difference, which initially reached up to $30, arose due to uncertainty and political risks associated with the transportation of oil from Russia, the majority of which was carried out by foreign companies. After new supply chains were established, the discount rapidly decreased. In December 2022, the G7 countries introduced an oil price ceiling of $60 per barrel, which caused the delta to increase again. However, as exports were reoriented and carriers were replaced, the gap began to narrow again and is now insignificant.
Simultaneously, a range of data on oil prices from the Russian Federation can be observed. Specifically, in Russian ports, the discount is $16-18, despite prices themselves reaching $65 per barrel, which is only slightly higher than the price ceiling set by the G7. In February, the average price for the Urals brand, from which export duty and planned budget revenues are measured, was $69 per barrel according to the Ministry of Finance. To understand the cost of oil, it is important to focus on specific numbers.

Firstly, it should be noted that Russia supplies oil both by sea and through pipelines. However, after European sanctions, the importance of the latter method decreased. Almost all exports to the east are now carried out through a small number of pipelines, such as ESPO and Atasu-Alashankou in Kazakhstan. In terms of maritime exports, the most popular brand of Russian oil, Urals, accounts for slightly more than half. The remaining brands include ESPO, Siberian Light, Sokol, and others. According to statistics compiled by Platts, approximately 30% of maritime exports are sold below the G7 ceiling, with the remaining 70% sold above it.
The Argus agency calculates the price of Urals in Russian ports. While traditionally the main source of data on the cost of oil from the Russian Federation, significant distortions resulting from the events of 2022-2023 make it difficult to consider the indicator fully representative.
Platts, a division of S&P, has been calculating prices based on Indian rates since early 2023. India has become a significant market for Russian liquids in recent years. According to Platts data, the spread between Urals and Brent has narrowed significantly in India. This is mainly due to rising prices in India, which has led to the general discount between all grades of oil from Russia and Brent being levelled. Why do we see almost equal quotations in India and such a significant difference in Russia? Isn't this gap dangerous, given the possible reduction in purchases by Indians?

Marcel Salikhov, President of the Institute of Energy and Finance, explained that price quotes differ depending on the delivery basis, i.e. the point at which ownership passes from the seller to the buyer. Oil prices can be determined on FOB terms, i.e. in Russian ports, or on CIF terms, i.e. in the buyer's ports. These differences in supply bases have a significant impact on price levels.

At present, the price difference between Date Brent and Urals is determined by several factors, including variations in transportation costs (freight) between bases, differences in insurance costs, variations in oil quality, and the risk of sanctions. In early March, the Russian Center for Price Indexes (CPI) reported a price difference of $16-18 per barrel between FOB Primorsk and FOB Novorossiysk with Dated Brent prices. Additionally, the cost of freight from the Baltic to Western India is currently $11-12 per barrel. These figures were cited by the expert.
Salikhov stated that there is currently a small discount in India.

For instance, in early March, the difference between Platts quotes for Dated Brent and Urals was $4-5 per barrel. This can be attributed to the component associated with sanction risks ($3-4) and differences in quality ($1-2).
According to Finam analyst Nikolai Dudchenko, India is still purchasing Russian oil at the same rate as last year.

The volume of Indian imports ranges from 1 million to 1.4 million barrels per day, which accounts for almost 30% of the Indian market. Bloomberg reports that Indian companies Bharat Petroleum Corp. and Hindustan Petroleum Corp. have not made firm commitments to accept contracted Russian oil. However, we believe that India is unlikely to abandon Russian raw materials. The increase in sanctions pressure from unfriendly countries strengthens India’s negotiating position to obtain additional discounts, according to experts.
Dudchenko explained that the decrease in discounts on Russian oil grades could be attributed to the terms of energy supply. He noted that India purchases oil on the basis of delivery at the port of destination (DES).

Additionally, the official discount for tax purposes in Russia will decrease. This year, amendments to the tax code regarding the methodology for determining the price of Urals are in effect, which will result in a decrease in the difference from $20 per barrel to $15. The analyst suggests that suppliers may attempt to negotiate a reduction in discounts with key hydrocarbon importers. This could have a positive impact on the discount on Russian oil.

Additionally, OPEC+ is considering further reductions in production and exports. This, combined with the forecasted slowdown in production growth in the United States this year, may create favorable conditions for reducing the discount. Meanwhile, the situation remains difficult due to increased control and the risk of buyers falling under secondary sanctions, as noted by Nikolai Dudchenko.

Marcel Salikhov also pointed out that in recent months, the Urals discount to Brent has increased compared to the end of 2023.

This is likely due to the more frequent use of secondary sanctions by Western countries against companies involved in transactions with Russian oil. The freight cost and sanction premium increased due to this. It is expected that the Brent/Urals spread will slightly decrease as the market adjusts to new conditions. The source concluded that it will drop to $14-15 by the end of 2024.