MOSCOW (Reuters) - Russia’s attempts to establish a futures market for its flagship Urals oil grade are faltering due to lack of support from international trading houses and the scarcity of oil on offer, industry sources say.
Russia launched trading of a futures contract for Urals oil URL-E in Moscow in November, to secure greater prominence for its export blend. But the taxation and clearing process have not been fully thought through, the sources said.
President Vladimir Putin had long called for the creation of a Urals futures contract, making clear his unhappiness that Urals is sold at a discount to benchmark Brent crude.
Urals is currently priced in the physical market, usually at a discount to Brent, by pricing agencies, which survey traders and refiners.
A total of 3,200 deals were clinched with the new instrument in the first six months of the year, data from the St. Petersburg International Mercantile Exchange (SPIMEX) show.
That is just a third of the daily target of 10,000 contracts that SPIMEX chief Alexei Rybnikov aimed to reach within 18 months when the market was launched.
No deal for physical delivery of oil under Urals futures trading has been concluded yet at the SPIMEX, Russia’s largest commodities exchange.
“The futures won’t be traded at necessary volumes unless oil majors, such as Trafigura, join,” an industry insider told Reuters.
Another source at a Western major said there are scarce Urals’ volumes available on the market because Russia’s largest oil producer Rosneft (ROSN.MM) has pre-sold Urals “for years ahead” to trading houses, notably Trafigura.
“Why would foreigners join the trading? This is the wrong time and the wrong place for that,” the source said.
For Western trading houses, it is much easier to buy oil directly from producers via tenders or pre-financing operations, which often promise discounts and guaranteed volumes.
“Why go there if you can buy a cargo in Primorsk? I don’t understand,” a Western trading source said, adding that there are also spot tenders, including by Surgutneftegaz (SNGS.MM), which offer enough liquidity.
Vitol, Glencore and Trafigura are key global oil traders working on the Russian market, taking more than half of Urals’ seaborne export volumes from Russia.
“Vitol is always pleased to see new markets evolve and is following developments with interest. Where there is demand, liquidity will naturally follow in due course,” Vitol said in emailed reply to Reuters’ request.
Vitol declined to comment on whether it already trades any volumes on SPIMEX. Trafigura declined to comment. Glencore did not reply to Reuters’ request for a comment.
The Urals’ futures market was launched at a time when Russia has been the target of economic sanctions imposed by United States and European Union over its actions in eastern Ukraine, although oil trading is not under sanctions.
Previous attempts to establish Urals as an internationally recognized benchmark grade failed, including a proposal in 2007 to trade the futures in New York with an option of physical delivery from Russia’s Baltic Sea port of Primorsk.
The Western trading source said the process of futures trading itself is cumbersome, while the government has yet to offer clear rules for taxation and clearing operations, necessary to balance buying and selling orders.
A SPIMEX spokesman acknowledged shortcomings in the regulations.
“At the moment, the exchange, jointly with the relevant bodies of the federal authorities, is working on settlement of some practical regulatory and technical issues,” he said.
Tax breaks have been proposed for foreigners dealing with financial derivatives to encourage them to use the exchange, he said.
By the end of the year, SPIMEX expects that there will have been at least one deal resulting in delivery of a physical cargo under trading of the contract.
Another industry source said SPIMEX was focused on attracting Western clearing houses to join its board to help lift trading in Urals’ futures contracts.
Last month, Igor Sechin, the head of Russia’s largest oil producer Rosneft (ROSN.MM) and who is under personal U.S. sanctions, left the SPIMEX board, which may make global banks more willing to handle clearing for SPIMEX.
Reporting by Vladimir Soldatkin; editing by Katya Golubkova and Adrian Croft