Zhuravlev Mikhail D. Senior Expert of the Economic Department

The InfoTEK magazine published an article “Urals goes the way of grain” by Mikhail Zhuravlev, senior expert of the Institute for Energy and Finance.

Who determines the oil price?

There are three generally recognized oil benchmarks in the world: American WTI, North Sea Brent and Middle Eastern Dubai Crude/DME Oman. The key feature of the benchmark is the independent determination of the price through exchange trading. The rest of the oil grades are "tied" to the benchmarks and follow their dynamics. Exchange trading generates certain pricing features, the main of which is that the "paper" market begins to prevail over the physical one.

Urals exchange trading

The Decree of the Government of the Russian Federation No. 623 of 2013 became "fateful" for the commodity trade. From that moment on, all sales of exchange–traded goods – oil, petroleum products, gas, coal, wheat, etc. - began to be registered on the exchange without fail. If agricultural goods came under the jurisdiction of the National Commodity Exchange (NTB), controlled by the Moscow Exchange, then all transactions with hydrocarbons began to be registered on SPIMEX. As a result, there is a register of all oil export transactions on the exchange, according to which the real export price can be calculated, called the "OTC Urals price index". This indicator is great for analytics and tax purposes, but contrary to public expectations, it is little applicable for traders and oil companies. Since the Urals stock price does not exist in nature, Russian exporters conclude transactions on Argus and Platts quotes, and the Urals OTC index is only an aggregation of such quotes. Thus, the OTC index is a time series of Argus prices, which can be used to determine historical, but not current shipment prices.

Unlike wheat, settlement futures for Urals can quickly gain high liquidity with proper promotion of the instrument. For Russian speculators, wheat is a difficult commodity to trade, while oil has been in demand for many years for various reasons. As you know, after the introduction of financial sanctions in 2022, the Russian stock market is dominated by individuals. Despite this, Brent futures on the Moscow Exchange are still popular and correspond to ICE prices, although they are traded separately. The trading volume per day is approaching 5 million barrels, while the share of individuals is kept at the level of 70-80%. Accordingly, the potential market for paper Urals is located within these boundaries if Brent trading is stopped on the Moscow Exchange.

The key question remains the underlying asset of the futures: at what price will expiration be carried out? Experience shows that foreign buyers do not want to purchase Russian oil through the stock exchange, and selling to their own traders does not look much like a free market. What will happen, if we launch futures on the same over-the-counter Urals SPIMEX index? Technically, this will be the futures for a quote from a price agency, since earlier we came to the conclusion that the Urals OTC index is an aggregation of the Argus/Platts quotation. But when high liquidity of exchange-traded oil is reached, looping may occur:

  1. Oil companies, focusing on the price of the Urals settlement futures, set their own export prices.

  2. Price agencies interview oil companies and publish a quote de facto based on futures.

  3. Futures price at the expiration date is of the pricing agency.

In such a scheme, it is exchange trading that will be the primary source of the price, and not Argus/Platts. This does not mean that the need for pricing agencies will instantly disappear. The Urals exchange price may show the FOB value in a particular port or region, but oil companies need dozens of quotes for different grades of oil in different parts of the world. So far, the price of ESPO and Urals oil on the CIF basis can only be determined by price agencies. Another question is that it can be done on its own without the help of Western organizations (although, for the sake of fairness, until recently no one had any questions about the quality of quotations).

Zhuravlev Mikhail D. Senior Expert of the Economic Department
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