Shell snaps up Russian Urals crude at record discount, faces backlash

Quantum Commodity Intelligence – Oil giant Shell Friday snapped up a cargo of Urals crude at the steepest discount ever recorded, a deal which will net the Stasco trading arm a huge profit, but has focused attention on the firm's Russia policy.

Shell bought the 100,000 mt (appx 723,000 barrels) March 14-18 cargo from trading house Trafigura at a discount of $28.45/b to the underlying Dated Brent Swap on a CFR Northwest Europe basis, according to broker and media reports.

Discounts for Urals crude have been tumbling since Russia launched a full-scale invasion of Ukraine, which prompted many oil firms to 'self-sanction' when it comes to lifting Russian barrels.

Several oil majors have also announced exit strategies from Russia, including Shell, after saying it would "exit its joint ventures with Gazprom and related entities".

However, the purchase of a discounted Urals cargo has come with negative connotations, making mainstream news reports and business heavyweights, including the FT and Wall Street Journal, both ran articles on what is otherwise a relatively opaque market that would rarely be mentioned outside of trade press.

The Financial Times said that the cargo could net Shell a $20 million profit, quoting a trader saying: "I am astonished that Shell lifted this cargo." 

Brent crude futures closed above £118/b Friday, while physical Dated Brent is over  $120/b, both at 10-year highs.

Contracts

Trafigura has contractual obligations to lift Urals crude and has been offering March barrels via the Platts Market-on-Close trading window for at least a week at increasingly steep discounts, with the spread against Dated Brent dropping by more than $20/b since Russia invaded Ukraine on February 24.

Most market watchers had expected a Chinese trading firm such as PetroChina or Unipec to lift the discounted cargo, in what would have made a very profitable arbitrage opportunity to China and unlikely to face public or media scrutiny.  

Sources said that Trafigura most likely buys term-contract Urals against the Platts Urals assessment, whereas the grade typically trades against Dated Brent in Europe or against Dubai when sold on a CFR basis into China.

Offering Urals via the Platts window will drag down the Platts Urals assessment, given the dearth of any other trade data, which means Trafigura and other term lifters pay a much lower purchases price to the likes of Rosneft and other equity sellers.

Had Trafigura not offered Urals in the Platts MOC window, sources said that the trading house would likely have paid a much higher purchase price, but would still have to sell the cargo at a steeply discounted price on a Dated Brent basis.

Analysts, including JPMorgan, estimate that over two-thirds of Russian oil is struggling to find buyers, while shipping rates have also soared. 

State-owned Rosneft is in the process of tendering over 80 million barrels of crude for sale in the April to October period, which sources say will face difficulties in attracting term buyers.