Price on request

03 August 2023

Kondratiev Sergey V. Principal Director on Economic Studies, Head of the Economic Department
Тип: Papers

The Kommersant newspaper published Sergey Kondratiev's column "Price on Request" about changing the approach to pricing on the Russian oil market.

What is the real cost of Russian oil

Over the past year, the Russian oil industry has faced many challenges, and one of the main ones has been the question of how to assess the cost of national oil in the new conditions. The answer to it could be its own quotation system, but Russia has a long way to go to create it.

Russia has tried several times to untie Urals from Brent by creating its own benchmark. Technically, Russian oil has all the necessary conditions: high physical liquidity (Urals exports exceed 2.7 million barrels per day, which is comparable to Basrah Medium, WTI Midland), a relatively diversified consumption structure (India, China, Middle East countries). However, so far it has not been possible to create an independent quotation that both the state and market participants would trust.

Now, in addition to the differential to the marker grades, the state has the opportunity to use data on transactions on the over-the-counter market (aggregated by SPBMTSB), as well as data on the cost of oil on the fob basis, which continue to be collected and published by Russian and international price agencies. In both cases, the key issue remains the credibility of these indicators due to the low transparency of the market. The over—the-counter index can objectively reflect export prices when excluding transactions with affiliated entities, but the problem remains that this is a "look in the rear-view mirror" - the index can be used for fiscal needs, but not when concluding export contracts. And its calculation does not solve the problem of "incorrect" quotes in Russian ports.

The way out may be the creation of a full-fledged quotation system not only in Russian ports, but also on the basis of the supply of Urals, ESPO and other varieties, which would allow an objective assessment of the current level of discounts. This is a difficult task that can hardly be solved in a few months, but it could open the way to the creation of a Russian marker variety. And on this path, Russia could cooperate with the countries that consume its oil, which would ensure and solve the problem of access to information and the necessary level of confidence in quotations.

Kondratiev Sergey V. Principal Director on Economic Studies, Head of the Economic Department
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