Russia's New Brand of Oil

In late October, the world's largest commodities exchange, the New York Mercantile Exchange (NYMEX), started selling futures on a new brand of Russian oil, Rebco. The first contract for the Russian crude was sold the next day, October 24. Fifty lots were bought at $50 per barrel; one lot equals 1,000 barrels. Daniel Brusstar, NYMEX's director for energy research, said it was a successful launch, since it usually takes about three days for a new brand to get a contract signed.

Rebco contracts signed in New York provide for the Russian crude to be supplied to the United States from the Baltic port of Primorsk free-on-board (meaning that a contract is considered fulfilled after the cargo is delivered to a carrier in the port of shipment). Contracts for Rebco will be offered for 72 months, Bloomberg reported. The symbol of the new brand's exchange code is RE, and the contracts are in U.S. dollars. The agreement to launch the new futures in New York was signed by Expertica with the participation of Russia's Alfa Group.

The most significant aspect of this event is the global launch of the new brand of Russian crude (Rebco stands for "Russian export blend crude oil"), which is expected to replace the other Russian brand, the well-known Urals. There is a funny episode linked to the launch: When Russian President Vladimir Putin was briefed on the forthcoming event at a government meeting, he said that it "sounds pleasing to the Russian ear." The journalists present thought he was referring to "Repka," a popular Russian folk tale, which in Russian sounds similar to Rebco. Only after a few hours did professional economists correct their mistake, which had already spread to newswires and Web sites.

However, the purpose of the name change was not to make it sound nice. It was to "unlink" the price of Russian oil from the benchmark Brent crude. The price of Urals, which will soon become a thing of the past, was determined by Brent. The difference has always been a bad one for Russian crude, with Urals' costing from 2 cents to $6 more per barrel. Last summer Putin demanded that the government reduce the gap. Russian experts say that, given increasing worldwide energy demand, it is beneficial for the Russian oil industry to launch a new brand with independent price setting. Kirill Androsov, Deputy Economic Development Minister, said "the sulfur content and density of Rebco will be lower than that of Brent, but that does not mean that it has to be cheaper."

Will Russia, which exports about 7 million barrels a day, manage to ensure high demand for its brand at a higher, independent, price? Neither Russian nor foreign experts are eager to try to answer the question. Analysts at Goldman Sachs, Morgan Stanley, UBS and other Wall Street firms say only that it took about four years to promote Brent, whose quality is significantly higher. They believe that the new Russian brand will be sold at a higher price than Urals, but how much higher remains to be seen. The Russian government hopes that contracts sold on the NYMEX will bring it about $3 billion annually, with the main buyers being European oil companies, refining firms and traders.

Indeed, Russian authorities have very ambitious plans to promote Rebco. After the United States, they want to launch it in London and Southeast Asia. But its main trading site likely will be the Russian Fuel and Energy Exchange being set up by the Economic Development Ministry. Putin said he would like to see the new exchange located in St. Petersburg. Local governor Valentina Matviyenko has already said she was willing to accommodate it in the historical building of the St. Petersburg Exchange, which now houses the Naval Museum.

The Exchange is set to open by the spring of 2007, Androsov said. Government buyers will be able to buy at least one-fourth of their annual consumption there. Trading will be in rubles. There are no financial problems with opening such an exchange in Russia, but successful trading needs global technology, which will be ensured by Rebco's launch in New York.

Industry analyst Ilya Zaslavsky is upbeat about changes on the domestic energy market: "Exchanges are meant to ensure transparent price setting. If they ensure maximum sales efficiency, oil producers will go there," he said. Yet producers are cautious in their forecasts. In order to attract large refineries, prices on the exchange probably should not be higher than in the direct contracts that are common now.

By Dmitry Dokuchayev

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