Analysis: Light crudes get cheaper vs heavy as COVID-19 hits gasoline, jet demand
Declining refining margins for transport fuels such as gasoline and jet fuel have impacted demand for lighter crude grades in Asia, with the value of premium grades such as Abu Dhabi’s Murban crude flattening against medium, heavy-sour barrels in March.
Spot price differentials for light sour crudes such as Murban have taken a beating in the spot market in March on thin demand as refiners face widespread demand destruction for lighter fuels. On the other hand refining margins for residual products such as high sulfur fuel oil have soared, supporting demand for heavier sour grades such as Oman and Basrah Light.
“Murban is currently valued near Oman in the spot market, which should give you some idea of how light sour crude is faring at the moment,” a crude trader in Singapore said.
While the outlook for transportation fuel demand remains grim amid the coronavirus pandemic, traders say the oil price war among major producers is likely to continue weigh on premiums of light, sour grades from the Middle East versus heavy, sour ones.
For the second month in a row, Saudi Arabia has set the official selling price of its Arab Extra Light crude at parity to Arab Light cargoes, forcing other producers to follow suit. Abu Dhabi National Oil Co. this month set its April official selling price for Murban at just a 30 cent/b premium to medium, sour Upper Zakum — the lowest at least since 1993. Murban’s previous low vs Upper Zakum OSP at 33 cents came at the height of global financial crisis in late 2008.
Asian refiners say Middle East producers are pushing them to lift lighter crude barrels, but they have little appetite because of weak gasoline and jet fuel markets. Light grades such as Murban yield a higher percentage of fuels such as naphtha, gasoline and jet, compared with heavier grades such as Oman that produce more heavier products including fuel oil.
The narrowing spread between light and medium sour crude grades prompted S&P Global Platts to announce a rise in the minimum threshold for quality premium that sellers receive for the nomination and delivery of a cargo of Murban crude oil into a physical convergence of Dubai, Al Shaheen, Upper Zakum or Oman partials during the Platts Market on Close assessment process, effective April 1, 2020.
Platts will raise the minimum threshold to 50 cents/b from 25 cents/b for the Murban quality premium, which is set at 60% of the net price difference between Platts front-month cash Murban assessment and Platts front-month cash Oman assessment during the full month prior to announcement, the company said in a subscriber note published March 24.
The higher minimum threshold will mean that a quality premium or QP of $0.00/b will be announced if 60% of the observed price difference between the Platts Murban and Oman assessments during the prior month is less than 50 cents/b, the company said, citing an unprecedented narrowing of the relative value of Murban compared with other grades in the Oman and Dubai baskets as a reason for the move.
WEAK GASOLINE VS FIRM FUEL OIL
Reflecting the disparate trends in the light and heavy ends, the FOB Singapore 92 RON gasoline/380 CST HSFO spread hit minus $4.24/b Monday, the lowest on record, before recovering slightly to minus $3.90/b Tuesday.
“I think demand for gasoline is dropping faster than for fuel oil because people’s movements are restricted now” while maritime transport was not as restricted, a fuel oil trader in Singapore said.
The rapid decline in gasoline has been mainly due to transport restrictions imposed in a bid to stem the coronavirus pandemic and rising supply from China.
The Asian benchmark Platts FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude fell to a 12-year low of minus $5.74/b at the close of Asian trade Tuesday, sharply lower versus the $6.97/b average in February, Platts data showed.
“There is little hope for gasoline if this virus continues to spread. Not everyone has locked down cities so there is still room on the downside,” a gasoline trader in Singapore said.
In addition to tepid demand, gasoline exports from China have remained heavy in March, adding to the overall weakness.
China’s CNOOC raised planned gasoline exports from its 440,000 b/d Huizhou refinery to 230,000 mt in March from 200,000 mt a month earlier, according to a refinery source. Likewise, Sinopec’s 184,000 b/d Hainan Petrochemical refinery increased planned gasoline exports to 80,000 mt in March from 60,000 mt in February, Platts reported earlier.
In contrast, residual fuel prices such as for high sulfur fuel oil have firmed given that refiners were already cutting production to adapt to new sulfur regulations in global marine fuels markets this year.
The COVID-19 related refinery run cuts have meant that HSFO availability has been hit further, raising its prices relative to other refined products.
“When they cut run rates at crude distillation units, output of straight run fuel oil is slashed, that is basically raising the HSFO crack spread,” a trader in Singapore said.
Demand for high sulfur bunker fuel, which fell sharply at the end of last year ahead of IMO 2020, remains firm and is likely to pick up as more ships fitted with sulfur-scrubbing equipment enter the market.
The Singapore 380 CST HSFO/Dubai crude crack spread hit a six-month high of minus $1.76/mt Monday before easing to minus $3.14/b Tuesday, Platts data showed. The last time it was higher was September 20, 2019, at minus 80 cents/b.