* Russian Urals, Saudi Arab Heavy margins improving as discounts widen
* Saudis could be looking to expand market share in Europe
* Lukoil heard to buy 500,000 barrels of WCS for Sicily refinery
Refining margins in Europe have been improving over much of the past month as a flood of supply in the market has depressed spot crude prices.
As European refiners compete for market share, crude producers that supply the region have been forced to discount local grades amid an influx of crudes from West Africa, the Persian Gulf, Latin America and even the US.
Urals cracking margins in Italy were 3.44/barrel Wednesday, up from a 30-day moving average of just $1.42/b, and up from just 23 cents/b from August 2013.
This improvement comes as spot Urals prices have come off. Urals CIF Augusta prices were assessed at $99/b on August 18, down from over $106/b in late July. Urals cracking yields, meanwhile, have fallen to just $104.59/b on Wednesday, down from a 30-day moving average of nearly $107/b.
Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.
The weaker market for crude has led Saudi Arabia to discount its grades as well, as the country seeks to gain market share in Europe. This has played into European refiners' hands, as the economics of running Saudi crudes have show an even greater improvement.
Saudi Arab Heavy margins hit $6.09/b Wednesday, up from a 30-day moving average of $3.78/b. This time last year, Arab Heavy margins were just $1.46/b over the month of August.
"It's very plausible that Saudi Arabia has shifted its priority slightly toward the other markets, such as Europe and Asia," Turner, Mason & Co. Director of Special Studies John Mayes said.
At a recent industry conference in Houston, Turner, Mason & Co. Executive Vice President John Auers said that the Saudis were increasing the discounts their crude could fetch in the European market, highlighting a potential change in strategy.
Auers has said in the past that the Saudis would not willingly cede market share in the US, and Mayes Thursday said the issue going forward would likely be driven by economic considerations, rather than political.
With the advent of North American unconventional production, Saudi market share in the US will most likely be maintained, but the question is where can the Saudis go to look for growth.
Saudi netbacks favor the US Gulf Coast, but they have been falling in each region. Thus, strength in margins are reflecting lower Saudi crude prices, and prices to Europe have led the way lower. This is best shown by looking at actual Saudi OSP discounts. Platts Arab Heavy differential to BWAVE in Northwest Europe was minus $8.40/b on August 1, down from minus $6.15/b on July 1. While this has since risen back up to minus $7.50/b for September 1, it is still almost $4/b cheaper than year-ago OSPs. "It's a question of how far the Saudis are willing to go," Mayes said. "Are they willing to vacate crude supply to the US, or will they keep it up for political reasons. There are probably better markets out there for their crude than the US, namely Europe and Asia."
WCS CARGO HEARD RE-EXPORTED TO SICILY
It is not just producers that are seeking to maximize market share. Despite widely discounted local grades, struggling European refiners have been forced to look further afield for crudes.
Lukoil was heard recently to have purchased a Suezmax-sized cargo of likely Western Canadian Select, re-exported from the US Gulf Coast, for its 320,000 b/d ISAB refinery in Sicily. The cargo left the US in early July and arrived in Sicily in early August, Platts cFlow ship-tracking software showed.
WCS is a 20 API, 3.5% sulfur crude.
This marks at least the second time WCS has gone over to Europe, following Repsol's purchase of a similar sized parcel in May. But WCS is not the only Western grade making inroads in Europe. Colombia's 24.3 API, 0.83% sulfur Vasconia has also become popular with Mediterranean refiners as it too can be had at a significant discount to Urals.
WCS delivered to the Mediterranean cost around $97.83/b on a July average of Platts data, including rail costs and freight costs. This put WCS at a near-$9/b discount to Urals for that month. The Repsol deal was heard tied to April prices, when WCS was at a less than $7/b premium to Urals.
And while the economics of the Lukoil deal are similar to the Repsol deal, the Lukoil refinery does not have a coker and is thus likely not seeking to maximize the distillate yield from heavy, sour crudes. Repsol's extensive upgrades, by comparison, were intended to do just that.
Lukoil's website says the Sicily facility has the ability to process medium-heavy and sour crudes, but Turner, Mason's Mayes said the WCS could be going into asphalt production, or even for bunker fuel. In Lukoil's case, the difference in delivered costs between the grades is likely more representative of Urals' superior quality and the unlikelihood that a refiner would seek to replace Urals with WCS.
