Chinese refineries raise prices for Russian ESPO crude to multi-month highs

The price of Russian ESPO Blend crude has exceeded $120 per barrel for the first time since April amid high demand from Chinese oil refineries. The increase is taking place amid a shortage of raw materials on the physical market, due to which Russian grades in Asia have practically lost traditional discounts to Brent within a few weeks, and in some directions are already sold at a premium.

Reuters reported on September 18, citing traders and market data, that ESPO had crossed the $120 per barrel mark. This is the highest level for this Russian grade since April.

The trend toward a sharp rise in ESPO prices had formed earlier. According to Platts, part of S&P Global Energy, in early September Chinese buyers sharply intensified competition for a limited number of Russian cargoes. The premium for ESPO delivered to China's Shandong province in November rose within a few days from about $4-5 to over $20 per barrel relative to Brent futures.

As of September 10, Platts assessed ESPO delivered to North Asia at $105.01 per barrel against $99.79 a day earlier. For comparison, the previous high for this indicator was $110.03 at the end of April. Thus, the further rise above $120 continued a trend that was already noticeable on the physical market at the beginning of the month.

Back in August, Chinese state-owned and private refineries began purchasing Russian crude ahead of schedule. By August 11, they had contracted at least 30 out of approximately 42 ESPO cargoes scheduled for loading in October, i.e., more than two-thirds of the monthly program. S&P Global noted that Russian supplies from the Far East became more attractive to Chinese plants due to disruptions in Middle Eastern routes and relatively reliable logistics.

In July, about 35 out of 42 ESPO cargoes went to China, while India received most of the rest. By September, competition intensified further: major buyers began taking the bulk of available ESPO, Sokol, and Sakhalin Blend, leaving less raw material for small independent refineries in Shandong.

Demand is also fueled by a reduction in the availability of other grades. Chinese independent refineries have more difficult access to Iranian crude, which traditionally was one of the main sources of cheap raw materials. At the same time, disruptions in supplies through the Strait of Hormuz and the Bab el-Mandeb have forced plants to hedge future needs more actively and buy Russian barrels in advance.

A similar situation is developing with another key Russian grade - Urals. As Kurs previously wrote, on September 16 one of the market indicators recorded its value at $121.61 per barrel against $111.77 a day earlier and about $81 at the beginning of September.

Moreover, in certain Asian destinations, Urals has already stopped selling at the usual discount to global benchmarks. According to S&P Global, on the west coast of India the grade was trading at a premium of about $1.05 to Brent, whereas in mid-August it was selling at a discount of $3.20. In the Baltic direction, the discount is maintained, which highlights the significant difference between prices of Russian oil depending on logistics and delivery location.

Thus, ESPO and Urals do not have a single "Russian price": the cost of a particular cargo depends on the grade, loading port, sanctions risks, transportation costs, and the final market. However, both grades are currently showing the same trend - a shortage of available oil in Asia allows Russian suppliers to sharply reduce the discounts that have been one of the main features of their exports in previous years.

Based on materials from: Reuters, S&P Global Energy, Kurs Ukraine