The traditional discount at which Urals trades to Brent has narrowed noticeably over the summer, averaging just USD 0.56/bbl since August and quite often trading at a small premium (Figure 1). We believe there are two explanations.
The first reason is that the price of Dated Brent (i.e. physical, deliverable Brent crude), which forms the anchor for the futures markets, is typically set by the price of crude delivered from the Forties system. That is because the price of Dated Brent is now actually calculated on the basis of the lowest price of traded crude from one of four North Sea crude streams, namely Brent, Forties, Oseberg and Ekofisk (BFOE) assessed over a specific time period. The value of Forties crude has been reduced following the start up of the relatively high sulphur Buzzard field which now typically forms the largest single component of the Forties crude stream. However, Buzzard has experienced a lot of production problems which have significantly lowered its availability, thus helping Forties to price higher (Figure 2). Now that Buzzard production is ramping up again, it is likely impacting the value of Forties and, hence, that of Brent futures.
However, that would not fully explain the Urals discount prior to the production problems at Buzzard. The second likely explanation for the improved pricing for Urals is that it has a lower naphtha yield (16% vs. 24%) and a higher fuel oil yield (48% vs. 38%) when run in a simple refinery, according to Argus. As global markets have become increasingly short distillate and increasingly long gasoline, and with naphtha based chemicals margins under pressure, that makes Urals a more attractive crude for refiners, especially those with limited upgrading capacity. Final supports for Urals are coming from disruptions to Iraqi supply, which competes on quality, and the risk that new sanctions might force European buyers of Iranian crude to look for comparable alternatives.