Russia is emerging as the winner from international sanctions against Syria and stands to benefit even more if the European Union bans imports of Iranian crude, keeping Russia's Urals crude at stiff premiums for months more.
Urals crude already has been fetching premiums over the North Sea Dated Brent benchmark since mid-October, the longest period ever.
"The strength of Urals relative to Brent in recent weeks is due to a combination of factors: uncertainty over the impact of sanctions on Iran and the loss of Syrian production and exports," Roy Jordan with consultancy Facts Global Energy said.
Forced to pay higher Urals prices, European refiners have been losing money, which could discourage the EU from moving ahead with a proposed ban on Iranian oil.
Urals is typically sold at discounts to Brent, because it contains about 1.3 percent of sulfur with API gravity of about 32, making it heavier and more sour than the crudes that go into setting the North Sea benchmark.
Most Iranian and Syrian crudes are similar to or heavier than Urals. All of these crudes require extra refining.
Syria exported most of its 150,000 barrels per day (bpd) of heavy sour crude to the Mediterranean before sanctions were imposed earlier this year following repression of civil protest against President Bashar al-Assad's 11-year rule.
Syrian heavy crudes were typically the alternative to Urals crude, when the Russian prices were high.
"As the Syria sanctions do not look set to change anytime soon, there is likely to be some continuous upwards effect on the Urals," said Samuel Ciszuk, a consultant with KBC Process Technology.
On top of that, if the EU agrees to ban imports of Iranian crude in January, European refiners would have to find alternatives for another 600,000 bpd of medium and heavy-sour oil -- a figure in the International Energy Agency's monthly oil market report released on Tuesday.
"I expect that the potential loss of Iranian crude imports will persuade European refiners to continue to pay a premium for Urals over Brent in the short-term until the situation relating to Iran is clarified," Jordan said.
The IEA said that even in a partial ban, European refiners would confront higher prices for replacement crudes from producers including Russia, Saudi Arabia and Iraq.
Saudi Arabia sells exclusively to term contract customers. Not all the sour crude buyers in Europe have contracts with the Saudis.
Russia, however, sells its crude on the spot market as well as term contracts.
Greece, which had relied on Iranian crude, recently bought a cargo of Urals crude from trader Glencore GLEN.UL for the first time in many months, traders said.
"They are certainly trying to test how life looks without Iranian supplies. Well, it certainly looks expensive," one trader said.
"Greece will find it very hard to live without Iranian oil by switching back to Urals."
Russia exported about 4 million bpd of crude, predominantly Urals, to Europe in November via tankers and pipelines, Reuters data showed. Its oil is traded by Russian and European oil majors and most big oil traders.
While Russia is the winner, European refiners have been the losers. The fears of an EU embargo are proving more harmful to them than to Iran, which could sell its oil to energy-hungry Asia.
Many European refiners such as Finland's Neste (NES1V.HE) and Italy's Eni (ENI.MI) have invested in recent years in advanced refining units such as desulfurizers and hydrocrackers to be able to handle heavy sour crudes. That strategy could backfire.
"Expensive Urals turns refinery economics upside down," an oil trader with a major said. "Everyone completed investment in their refineries to buy more Urals and other sour (crudes), where the cost savings used to come from."
Cracking margins to make refined products such as gasoline and diesel from Urals have fallen to a loss of $1.25 to $2 a barrel in the past two weeks, said consultant Jordan.
By contrast, the Reuters refining margins model shows refiners can still profit from light-sweet Brent crude.