Strong Urals paves way for Russia to invest in capacity

Urals crude values topped $95/bl last week to reach the highest since September 2014 - well above the level assumed in the Russian government's budget and exceeding the expectations of the country's top oil firms. If sustained, prices at this level would make it easier for companies to invest in expanding their production capacities to support further output growth in Russia as Opec+ restrictions ease.

Outright Urals prices rose in northwest Europe and the Mediterranean last week, reflecting general strength in the global crude market and recovering demand for distillates. Although Urals discounts to the North Sea Dated crude benchmark widened, with European buyers' interest in sour crude weakening on the back of rising costs to produce low-sulphur oil products, the outright price is much higher than the Russian government anticipated.

Russia's federal budget is based on an average Urals price of $44.20/bl this year. When prices rise above this level, additional state revenue from crude exports goes to the National Wealth Fund. Russia's central bank forecast in October last year that Urals would average $65/bl in 2022, $55/bl in 2023 and $50/bl in 2024.

The higher-than-expected price will provide a windfall for Russian oil companies struggling to raise their crude production. By the end of last year, the country's leading producers had used up much of their spare capacity as the Opec+ group began to gradually unwind the restrictions placed on output in May 2020. Russia's crude output growth has slowed as a result. The country only manage a 10,000 b/d increase in production in December, leaving it 70,000 b/d short of its 10.02mn b/d Opec+ quota, according to Argus estimates.

By Anastasia Krasinskaya and Diana Mukhametzyanova