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Russian Oil Tumbles in Europe in Wake of Deep Saudi Discounts

Russian Oil Tumbles in Europe in Wake of Deep Saudi Discounts

(Bloomberg) -- The price of Russia’s main crude oil slumped in Europe after Saudi Arabia promised to sell its own barrels at huge discounts.

Vitol Group and Trafigura Group Ltd. failed to find buyers on Monday when they offered to sell Urals crude at the deepest discounts to a regional benchmark in almost two months. Two days earlier, Saudi Arabia slashed the price of its own grades and then promised to ramp up output. The two nations disagreed last week about how to tackle a global glut that’s been exacerbated by the coronavirus.

Russian Oil Tumbles in Europe in Wake of Deep Saudi Discounts

“There is little doubt that Urals will be a casualty of the recent Saudi pricing policy,” said Eugene Lindell, senior consultant at JBC Energy GmbH in Vienna. “Refiners will process as much April-loading Saudi crude as they can procure, and this will come to the detriment of spot grades, notably Russian Urals.”

Saudi Aramco, the state oil company, will supply a record 12.3 million barrels a day to the market in April, a level that’s above its maximum sustainable capacity and indicating that the kingdom is even tapping strategic inventories to dump as much crude -- as quickly as possible -- onto the market.

Deep Cuts

On Saturday, Aramco made cuts of $8 a barrel for most grades to northwest Europe. Arab Light will sell for $10.25 less than Dated Brent in April. The reductions were huge by historic standards.

While that will make Saudi grades significantly cheaper than Brent, the main benchmark in northwest Europe, it will also make them more competitive against Russian barrels. Vitol and Trafigura both offered Urals at about $3 below Dated Brent, the weakest in almost two months, according to people monitoring a price-assessment window organized by S&P Global Platts.

Urals could trade as low as $6 a barrel below Dated Brent, even if the monthly average discount will probably be smaller than that, Lindell said. European buyers may not be able to procure as much Saudi oil as they would like, he said.

Paper markets for Russian oil also showed weakness, selling off sharply on Monday, brokers said. April contracts for difference settled at -$3.40 on Monday compared with -$1.47 on Friday, according to ICE Futures Europe data. Almost 3,000 contracts traded, about a third of all those currently held.

Russia can boost production by 500,000 barrels a day, said Alexander Novak, the nation’s energy minister. That would potentially put the country’s output at record 11.8 million barrels a day. Top producer Rosneft PJSC is planning to lift output by 300,000 barrels a day, probably as soon as April 1.

Before the pledges to lift output, Russia had scheduled seaborne Urals exports in March of 7.84 million tons, or 1.85 million barrels a day, compared with 2 million barrels a day for February, according to loading program seen by Bloomberg. It’s not clear how much, if any, of the mooted increase in output will translate into a hike in exports.

Brent futures plunged by almost a quarter on Monday, the biggest drop since the 1991 Gulf War. They rallied on Tuesday.

--With assistance from Alex Longley.

To contact the reporter on this story: Sherry Su in London at lsu23@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, John Deane

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