Russia's efforts to boost oil flows via Baltic seaports have created a glut in north European markets, making its Urals crude increasingly reliant on exports to Asia and the United States, traders said recently.
Urals crude deltas plunged to near record lows in northern Europe this week after Opec's output hike threatened to flood world markets with sour crude and shut the US and Asian arbitrage outlets necessary to absorb surging Baltic supplies.
Urals' discount to the Dated BFO benchmark fell over $1.50 this week to almost $4.50, the weakest in four years and just cents away from an all-time low.
"The main reason Urals has been so well supported so far this year is that the arbitrage was working, transatlantic as well as to Asia. When it closed, that was the main reason prices collapsed," one dealer said.
"In the past year we have seen Urals become more and more reliant on the arbitrage," he added.
Russia is now producing almost on a par with Saudi Arabia at nearly nine million barrels per day (bpd), exporting over four million bpd.
To cope with bottlenecks at its core Black Sea export outlets, the country's pipeline monopoly Transneft has steadily boosted supplies via the Baltic route of Primorsk.
Primorsk now exports 850,000 bpd up from 240,000 bpd two years ago, and is expected to rise further next year. Supplies have also risen at other northern ports, particularly Gdansk while regular exports are now being shipped from Murmansk and Vitino.
Traders say this has displaced some Middle Eastern volumes, with ExxonMobil in particular taking more Urals instead of Saudi crude for its refineries in northern Europe. The company is estimated to buy about 18 million barrels every month delivered into Rotterdam, compared to about eight million in the past.
In the past, Urals was usually entirely consumed by European refineries but exports volumes have grown so rapidly that the grade has had to be shipped to markets outside of Europe, especially Asia, the traditional preserve of Middle Eastern crude.
Several million barrels have regularly sailed every month in the past year to the United States and Asia, whenever freight and spread economics have permitted, easing the pressure on European markets.
"In the past year or so there has been a radical supply shift that has completely clogged up the sour crude market in Europe," one trader said. "All this volume has just overwhelmed the European market. It needs to leave the region if prices are to be sustained."
Under pressure to calm soaring oil prices, Opec last week agreed to hike crude supplies. Saudi Arabia and the United Arab Emirates said they would add one million bpd of real extra oil - most of it sour crude competing with Urals - in June.
Opec states Saudi Arabia, Iran and Kuwait have said they will provide Asian buyers with full contract volumes for July. Saudi has told buyers extra oil will be available if needed.
The fall in the price of the Urals and the weaker Brent has finally opened the door for shipments East but the grade has to compete hard with Opec crudes and traders say sellers have had to cut prices by about 70 cents compared with earlier this week.
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