The premium that key sweet North Sea crude grade Forties commands over sour Russian export crude blend Urals in Northwest Europe has hit the highest level since the end of September as differentials for Urals have plunged in recent weeks.
Forties commanded a $4.23/barrel premium to Urals in NWE on Wednesday -- the highest since September 29.
In the intervening period, the premium fell to a low of $0.53/b on November 23.
The widening of the premium has been largely linked to Urals differentials collapsing in recent days.
Differentials for the grade slumped to the lowest level in six months, falling to a $2.17/barrel discount to Dated Brent at the end of 2011, losing almost $2/b over a week.
Part of the fall in demand for the grade was linked to a drop in end-user demand and reported run cuts across European refineries in December, coupled with news that independent refiner Petroplus was set to idle three of its five European refineries due to financial difficulties.
This followed an announcement on December 27 that around $1 billion in credit lines to the company had been frozen by lenders.
The five refineries have a combined throughput capacity of about 667,000 b/d.
According to trading sources, Petroplus regularly buys around four to five Urals crude cargoes each month.
The refiner also buys cargoes of Forties and other North Sea crude grades, however the impact on this market has been less stark, traders said.
Forties differentials in contrast to Urals differentials have risen steadily in recent days, hitting the highest levels since the start of October with the grade assessed at Dated Brent plus $0.98/b on Wednesday.
Tuesday saw the greatest day-on-day rise in differentials in more than ten years rising $0.895/b from Monday's level.
The steady rise has been partly linked to arbitrage movements of the grade out of the region, particularly to Asia, while there was also discussion of cargoes of the grade moving across the Atlantic.
However, the rise in differentials has hit local refiners' appetite for the grade, and traders questioned if current levels for the grade would hold up.
In the forward market, contracts for difference for Dated Brent, which is typically linked to the price of Forties, show backwardation.
Between this current week and next week the CFDs indicated $0.55/b of backwardation with roll between next week and the week after of $0.30/b.
In contrast, current levels for Urals were promoting processing of the grade, with one trader suggesting that buying for storage was currently an option.
"Urals [refining] margins are fantastic...at these levels it is almost profitable to buy Urals and stick it into tank," said one trader.
Healthier refining margins and EU countries agreeing Wednesday in principle to ban the import of Iranian oil meanwhile set a bullish tone for the Urals crude market, traders said.
This in turn could narrow the Urals-Forties spread, sources said. "Urals margins are fairly good... Iran gives sentiment for a stronger market," said one trader.
"Iran will produce more crisis compared with what we already have. Of course, everybody would be able to replace Iranian grades. But what price would you have to pay for the replacement? We are talking about 3.4 million b/d," another source said.
