General Index Oil Refinery

Global Market Analysis, 01 April 2022

- Brent futures volatility intensifies on Russia-Ukraine conflict
- Russian crudes go underground
- Counter-seasonal strength persists in Asia LPG

Brent futures volatility intensifies on Russia-Ukraine conflict
By Chen Ee Woon

ICE Brent futures has long been considered the world’s leading crude contract with unparalleled liquidity for efficient price discovery. However, the benchmark has been defined by unprecedented volatility since the start of the Russia-Ukraine war.

General index, crude benchmarks

The main driver of volatility stems from headlines emerging from the conflict, and the financial sanctions and oil bans on Russian exports associated with it.

However, the size of fluctuations stemming from the primary driver has triggered a snowball effect which amplified the volatility of the futures contract.

According to reports, many participants were driven out of the market due to the increased risk of high margin calls at market close.

Margin calls is a mechanism in which holders of future contracts are required to deposit/withdraw cash in their broker’s account to guarantee payment. Smaller players without the capital to weather high margin calls are therefore squeezed out of the market.

Data from ICE reflects this trend. Open interest, defined as the number of open contracts held by the market, was falling before Russia invaded Ukraine, but the downward trend has accelerated in its aftermath.

ICE Brent Futures

Lower open interest indicates shallower depth in the order book, meaning prices could be moved significantly with less capital.

Alarmed by the marked increase in volatility, authorities have implemented measures to ensure contract obligations are fulfilled. The Intercontinental Exchange announced on 25 Mar that margin requirements for the ICE Brent contract would increase.

For example, May expiry ICE Brent futures saw its margin requirements raised by 18.84%.

While these measures may be effective at ensuring contract obligations are fulfilled, it is likely to increase the volatility in the short term by squeezing out players unable to deal with increased margins.

Russian crudes go underground
By Chen Ee Woon

In response to the Ukrainian invasion, sweeping sanctions by governments and private players have been imposed on Russian banks, resulting in markedly lower interest in Russian crude grades.

Current reports suggest that Urals is trading at discounts of US$-30.00/b to Dated Brent while ESPO is valued at a discount of US$-15.00/b to Dubai.

While eye-catching, one must bear in mind that these prices are indicative – estimates made by pricing agencies from public trade data which has become vanishingly low post-war. For example, no recent Urals trade were executed on Platts’ window. The assessments are purely based on offers that were not lifted.

The true value of Russian crude is likely higher. Market chatter indicate that private negotiations are happening away from the prying eyes of the public. Levels heard for Urals are higher. US$-20.00/b discounts were heard for Urals although it is impossible to confirm the price.

At the same time, longer loading programs for both Urals and ESPO have been seen by General Index. The April loading Urals program is about 12% longer month-on-month whereas the ESPO program is about 10% longer month-on-month.

Observers have pointed out that the longer Urals program could be due to maintenance season for Russian domestic refineries. Excess Urals cannot be refined domestically and hence must be exported.

There is, however, no clear reason why the ESPO program is longer. Conversations with ESPO traders based in Asia suggests some level of anxiety as there is a dearth of trade intelligence on the grade.

“Question is how are they marketing and disposing of these cargoes? Almost no intel of market!” said a teapot ESPO trader.

The evidence listed above thus points to Russian crude being marketed underground. Furthermore, flows of Russian crude could be higher than what was initially estimated.

Russia’s chief diplomat Sergei Lavrov visited India this week. Bloomberg reports indicate that brokering an energy deal that can bypass SWIFT sanctions is at the top of the agenda and that Rosneft has offered to sell India crude at “discounts of as much as $35 a barrel on prices before the war”.

Previously, India has refrained from importing Urals due to prohibitive freight costs from the Baltics. Ideas to reroute Urals to the far east port of Vladivostok were floated to reduce the costs of freight but it is difficult to see how this could be done given limited pipeline connections between east and west Russia.

There is also the question of how suitable Urals is for Indian refineries and question marks linger over how much they could process given how little the country has bought from Russia historically. Recent purchase data indicated 10mn bl bought in March, but details are still emerging and it is unclear if more spot Urals will be purchase in future months.

Nevertheless, if a deal was struck, Russian crude flows could improve massively depending on how much crude India is willing to buy. Prices could then cool significantly from current levels.

Counter-seasonal strength persists in Asia LPG
By Zulfadhli Kader

In response to the Ukrainian invasion, sweeping sanctions by governments and private players have been imposed on Russian banks, resulting in markedly lower interest in Russian crude grades.

The ongoing conflict between Russia and Ukraine continues to send shockwaves through commodity markets. In a change from seasonal patterns, bullish sentiment seems to be holding for LPG in the final two weeks of March. Buying activity picked up to finalise H2 April and H1 May positions, ahead of Aramco’s April Contract Price (CP) announcements due on the first day of the month. The biggest issue facing Asian demand seems to be increasing competition with European buyers, as the two regions vie for limited supply available in the global supply chain.

In the week starting 21 March, General Index heard a trade for H2 April at Far East April plus US$40/MT on the Monday, with levels rising to  an outright price of US$960/MT by the end of the week, equivalent to Far East April plus US$44.25/MT.

Russian cargoes were still being on offer in the market, but they were still struggling to find buyers despite large economies having relatively low inventories at a time when key producers are either reluctant or unable to produce more. As it stands, the only producer with real spare capacity to offer is Iran. This could add an extra 1mn bl to the market if/when US sanctions are lifted. But the wait for a breakthrough in negotiation continues, although the volume will be insufficient alone to offset the loss of Russian oil.

General Index, Asia LPG

The week starting 28 March saw LPG maintain its momentum. General Index heard a trade for H2 April at Far East April plus US$44/MT. With the month coming to an end, buyers seem to have shifted their focus to the following half month, looking to finalize H1 May positions. General Index heard a trade for H2 April on 29 March at Far East April plus US$39/MT, as well as a trade for H1 May at Far East May plus US$48/MT, $4 higher than the bids GX heard the previous week.

The most striking physical movements General Index heard this week included an offer for H2 May, the first offer General Index has heard in three weeks. BASF offered on 29 March for H2 May at Far East May plus US$37/MT. Despite this apparent increase in spot availability, broader sentiment remained bullish, with many sources  pointing to below-target production growth by the OPEC+ group. It has committed to raising output by 400,000 b/d increase every month since August 2021.

Virginia Bridgewater
Chen Ee Woon, Energy Analyst
Zulfadhli Kader
Zulfadhli Kader, Energy Analyst
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