General Index Oil Refinery

Global Market Analysis, 04 March 2022

Oil prices soar as Ukraine conflict escalates, global markets sever links with Russia

- Europe
- Mideast Gulf and Asia
- North America

Oil prices soar as Ukraine conflict escalates, global markets sever links with Russia

By Virginia Bridgewater

Oil prices reached ten-year highs this week as penalties mounted against Russia despite no direct oil and gas export sanctions, and the rouble plummeted against a surging dollar. The Russian stock market has remained closed since Monday. In Europe, General Index Dated Brent was assessed at $119.80/b on Thursday, March 3, having fallen back below $100/b at the end of last week after the initial post-Ukraine invasion surge to $106/b. In the Middle East, General Index Dubai partials (M1) rose to $116.59/b. On the futures markets, Brent (M1) got as high as $119.84/b intraday this week (the highest since May 2012), while US WTI futures (M1) reached highs of $116.51/b.

General index, crude benchmarks

Though there are as yet no direct oil and gas sanctions Middle East traders showed clear signs of seeking alternatives to Russian crude with futures spreads showing steep backwardation. Dubai prompt backwardation of +$12/b was the highest since 1984.

In the meantime, indicative General Index ESPO values dropped to $2.50/b on Monday from $6/b against M3 Dubai, falling closer to $0.00/b by the week’s close amid limited spot market activity – a strong indicator of Russian barrels finding fewer homes.

Commercial freight operators were proving unwilling to take the risk to load out of the Black Sea and Baltic both due to the physical risk of getting caught up in the crossfire (in the former), as well as the trading risk from sanctions, as noted by The Signal Group. That's led to a sharp reduction in tanker availability and spike in freight rates.

Most major oil companies had pledged to withdraw from Russia operations. Exxon Mobil said on Tuesday it would exit all Russian oil and gas operations, valued at more than $4bn; while on Monday BP offloaded its 19.75% stake in Russian state-owned oil firm Rosneft, worth around $2.7bn. Shell will also end all its joint ventures with Russia’s Gazprom, including its 27.5% stake in the Sakhalin-II facility and its involvement in the Nord Stream 2 project. Norwegian major Equinor has said it will begin divesting from its joint ventures in Russia, worth more than $1bn.

Eni said on Tuesday it will sell its 50% stake in Blue Stream Pipeline Company BV, set up along with Gazprom in 1999 and connecting Russia to Turkey.

Canada also plans to halt its albeit limited imports of Russian crude oil, putting pressure on other western countries to do the same.

The US dollar has surged against all the major currencies while the premium for dollar funding for yen and euro-based investors has risen sharply. Foreign-listed shares in Russian companies have tumbled and its foreign assets have been frozen. There’s a growing risk that Russia’s stocks and bonds could be kicked out of major investment benchmarks as they become increasingly hard to trade: MSCI Inc and FTSE Russell said on Wednesday they are cutting Russian equities from widely tracked indexes.

As concerns grow over energy supplies and the effect on the global economy, Sberbank, part-owned by Gazprom, was spared the European Union’s exclusion of seven Russian banks from the SWIFT financial-messaging system. But by Wednesday it had been forced to close its European arm as shares collapsed 95% to be worth just US$0.01.

By Monday the rouble had slumped 30% against the dollar and Russia had doubled it interest rates, to 20% from 9.5%, to try to halt the rapid depreciation of the rouble. Oil, gold, metals, corn and wheat all surged to new highs. Meanwhile shares in Gazprom plunged at least 20% in London. In the global financial markets there has been a rush into bonds.

S&P Global Ratings lowered Russia’s credit score below investment grade on Friday, while Moody’s Investors Service – which rates Russia one notch above junk – put the nation on review for a downgrade.

Most of Europe has closed its airspace to Russian carriers which will stop cash being transported out of the country. Many of Europe’s big ocean carriers have suspended orders for Ukrainian shipments and for many shipments in and out of Russia.

In emerging markets, Bitcoin exceeded $44,000 on Wednesday amid rumours that Bitcoin could be used more for payments in the wake of sanctions against Russia.

After ten months of wrangling in Vienna over a nuclear deal with Iran the stakes have been raised by the Ukraine invasion. An agreement could bring Iranian oil back to the table which, in the face of +$120/b oil, could be a game changer. If talks collapse, oil prices could climb ever higher. Prices receded from 10-year highs on Thursday after the US State Department said it was "close to a possible deal". The International Energy Agency on Tuesday that it will deploy 60mn bl from emergency oil stockpiles around the world, while on Wednesday OPEC stuck to releasing just a further 400,000 b/d in April.

EIA weekly data shows continuing declining crude and products inventories with stocks already at multi-year lows.

Global oil benchmarks react to spiralling events triggered by war in Ukraine

Oil prices have surged to fresh highs on Russia’s escalating war in Ukraine. The General Index team summarise some of the key developments seen across our benchmark prices.


By Virginia Bridgewater, Arran Brodie, David Elward and Nakul Hirani

- General Index assessed Dated Brent at US$119.80/b on Thursday, 3 March. The benchmark for North Sea light sweet crude has risen $20.31/b since last Friday, and is now up $40.79/b since the start of the year.

General index, crude benchmarks

- The sky for prices appears to be the limit, as the market has finally woken up to the reality that Russia’s oil exports are indeed being impacted, even if Western sanctions do not (yet) directly go after Russia's crude and product flows. The UK and EU are blacklisting Russian vessels from entering port, and while this does not extend to Russian cargoes per se many traders are self-sanctioning, refusing to handle Russian origins. Energy Intelligence Russian oil exports have been cut by 2.5mn b/d so far: 1.5mn b/d of crude and 1mn b/d of products.

- Europe’s diesel futures contract (M1) was testing levels around US$1125/MT at the time of writing (1250 GMT on Friday, 4 March). The ICE LSGO futures contract has added more than 67% since the start of the year, pushing pricing for linked jet fuel, diesel and gasoil markets well into $1000/MT territory. ICE LSGO futures (M1) calculated as a crack spread versus Brent futures now stands +$38/b, up from $18/b at last Friday’s settlement.

General Index, NWE Flat Prices

- A global diesel shortage was brewing even before Russia invaded Ukraine. Global refinery output growth was proving to be sluggish following the pandemic, resulting in drains on inventories. Prompt backwardation on ICE LSGO futures (M1/M2) had risen above +$20/MT by mid-February. But as Europe’s single-largest supplier of diesel and gasoil by country, the prospect of disruption to Russian flows in light of the war in Ukraine is transforming the regional pricing landscape. The backwardated structure has soared to +$56/MT on the prompt. Russian origins accounted for 52% of total diesel/gasoil imports into Northwest Europe last month and 20% into the Mediterranean, according to Kpler tanker tracking of seaborne cargoes.

- Refinery cracks have exploded on middle distillates, led by diesel:

General Index, European Cracks

- General Index ULSD 10ppm Med Cargoes as a crack spread to Brent futures was assessed at +$35.01/b on 3 March, with the corresponding value for NWE at +$34/b. This is up from closer to +$17/b at the end of last week.

- General Index Gasoil 0.1% NWE Cargoes as a crack spread to Brent futures was assessed at +$33.09/b, and +$28.73/b for the Med (up from closer to +$15/b a week ago).

- Less affected but still higher are Jet Fuel and Gasoline: CIF NWE Cargoes at +$26.37/b (up from +$15.05/b) and +$14.54/b (+$13.14/b), respectively.

Mideast Gulf and Asia

By Zulfadhli Kader, Eesha Muneeb and Chen Ee Woon

- One of the most eye-catching trends on Mideast crudes has been deepening market structure for Dubai. General Index assessed the backwardation for Dubai Partials M1 vs M2 at +$12/b on 3 March, the widest since 1984. Meanwhile, Dubai M1 vs M3 is trading at +$16/b. A similar trend has been seen on Oman futures.

General Index, Dubai Oman spreads.

- This points to Asian buyers turning to Mideast crudes as suitable replacements for both Urals and ESPO. Difficulty securing letters of credit (LCs), high freight rates and the prospect of new sanctions are discouraging buyers from purchasing Russian crudes. Freight on the Kozmino-China route has doubled to US$800,000/b.

- China has also ordered domestic companies to secure commodity supplies, which is likely to lead to a surge in buying interest.

- The trading cycle for ESPO has yet to commence, but indicative values estimate ESPO at between $0.00/b-$5.00/b versus Dubai M3, below pre-Ukraine war levels.

- At the same time, the Brent/Dubai EFS has widened to +$18/b. Buyers in the Atlantic Basin are attempting to pull barrels, causing the EFS to widen. Meanwhile, Mideast structure has also deepened to a similar extent in order to remain competitive.

General Index, Propane M1 Swaps

- On Asia LPG markets, the past week has seen a drastic increase in both swaps and physical pricing. One of the most striking price changes can be seen in the FEI/CP Propane swap spread. General Index assessed the swaps spread (which captures Far East Asia vs Middle East dynamics) at minus $3/MT for the week ending 25 Feb. By 2 March, the price had fallen to minus $24.75/MT.

- With increased sanctions leading to difficulties in paying for Russian exports, buyers that previously relied on supplies from the region have searched elsewhere to source for their LPG needs, turning to the Middle East in the short term. This in turn has caused FOB loading prices for Middle East cargoes to skyrocket, leading to the FEI/CP spread inverting in recent weeks, as CP Propane swap prices have increased at a faster rate compared to Far East Propane swap prices.

- This was mainly caused by redirection of oil flows from the Baltic Sea port to the East, requiring a 12-day increase in transit time, equivalent to a loss of 90mn bl. The solution for buyers here was to look for the next available port from a major producer, which in this case, was Saudi Ras Tanura, hence, the increased demand for CP Propane.

- As it becomes increasingly likely that Russia, a major LPG producer, will be ostracized from the global economy, the focus has switched to the Middle East, with producers looking to replace the supply gap, and buyers turning their attention to core-OPEC countries to meet their demand. This means, along with depleting global spare capacity, expectations are that prices will continue to increase.

- Simultaneously, as Saudi Arabia and UAE have increased their production, coupled with the lifting of Iran’s US secondary sanctions, it is highly likely we would be seeing an increase in ME supply over the next few months.

North America

By Jeffrey Bair

- The invasion is roiling all world markets, including those as far away as the fuel keeping people warm in England in the USA.

- Low-sulphur heating oil along the Colonial Pipeline into the Atlantic Coast is up 30% since 22 Feb. This is at a time of year where heating oil should be dropping in value as the bitter winters step off stage.

- The home heat source rose more than 70 cts/gal since the invasion on the back of strength in its basis, diesel futures, which gained 30 cts/gal on 2 Mar to hit numbers not seen since 2008.

- New England and the Northeast essentially represent the last major consumer of heating oil in the United States, with many markets now served by natural gas or propane for warmth.

- Strong trucking demand for diesel during the pandemic recovery has kept US futures prices elevated atop the North Atlantic Basin. The premium for New York Habor ULSD futures (M1) over ICE LSGO (ARA) futures had reached in excess in +$80/MT last month; but a rally on the European side in recent days has seen the premium slide to closer to +$12/MT. The spread has someway yet to go until it inverts and begins to make the arbitrage (at least on paper) viable from the US to Europe.

General Index, NA Fuel

- Kpler currently predicts US diesel/gasoil departures for Europe in March at 169,000 MT, up from 104,000 MT last month. These are small volumes compared to several years ago. But in the event European traders stop lifting Russian diesel/gasoil cargoes en masse, they’ll come pulling on supply from other viable outlets, such as the US.

- ULSD's spread over jet fuel in the Gulf Coast jumped to 26 cts/gal Thursday, 3 March, on the diesel rally. The spread had been around 15-18 cents most of Feb. Valero, Musket and Pilot were major buyers of ULSD Thursday.

Virginia Bridgewater, Pricing Director LPG
Virginia Bridgewater
Nakul Hirani, Energy Analyst
Arran Brodie, Energy Analyst
David Elward, Senior Pricing Analyst
David Elward, Senior Pricing Analyst
Zulfadhli Kader, Energy Analyst
Virgini Bridgewater
Chen Ee Woon, Energy Analyst
Eesha Muneeb, Pricing Director
Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Pricing Director, Americas Refined Products
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