Robust middle distillate margins lift Asian demand for Middle East crudes
Asian demand for July-loading Middle East medium sour grades has strengthened as healthy refinery margins for middle distillates, improved Chinese appetite and a closed arbitrage window allayed concerns that cheap Russian barrels could curtail buying, market sources told S&P Global Commodity Insights.
Medium sour crudes such as Oman Blend, Al-Shaheen and Upper Zakum were attracting ample demand in Asia as middle distillate cracks surged and China returns to the market after a COVID-19 induced buying lull, traders said.
Chinese demand has been a concern due to lockdowns in Shanghai hurting oil and product consumption, but signs of improvement were now increasingly visible, a trader in Singapore said.
Earlier this week, ChemChina was heard to have bought around 6 million-8 million barrels of July-loading Oman and Murban crude, while independent refiners Rongsheng and Shenghong bought a total of around 6 million barrels of various Middle East crudes earlier in the trading cycle.
Reflecting the emergence of Chinese demand for Oman crude, the cash Oman-Dubai futures spread jumped to a premium of $6.08/b at the Asian market close May 18, the highest since March 31, when it was assessed at a premium of $7.30/b, S&P Global data showed. The spread eased slightly to a premium of $5.97/b May 19.
In Qatar Energy’s tender offering July-loading Al-Shaheen crude, cargoes were heard sold to Japanese buyers and an oil major at an average premium of around $6.02/b to Platts Dubai crude assessment.
“Al-Shaheen has more gasoil yield; now gasoil [demand] more strong from refineries,” a trader with a North Asian refinery said.
At the start of the July trade cycle, market participants feared Middle East medium sour crude could be pressured by regional refiners, including those in India and China, considering opting for cheaper Russian alternatives such as medium sour Urals.
“They [medium sours] are strong; I see good demand, especially from India, since they can’t load their cokers with Russian,” a trader with a Western oil producer said.
While Russian flows to Asia reportedly continue, this has done little to dent sentiment for Middle East medium sour crudes, the trader with the producer said. “Cokers need to be fed with heavy sour, and Russia doesn’t have those grades,” the trader added.
Limited arbitrage barrels from the West have also boosted interest for Middle East grades, sources said.
“Gasoil driven [demand] mostly and the wide Dated [Brent-]Dubai spread,” the trader in Singapore said referring to the economic viability of Dubai-linked crudes compared to Brent-linked ones.
The Brent-Dubai Exchange of Futures for Swaps, or EFS, is often tracked as an indicator of North Sea low sulfur crude value versus Middle East high sulfur crude, and a wider EFS makes crude priced against Dubai more economically attractive compared to Brent-linked ones.
“US Midland grade [has been] strong last few days; arbitrage shut to East and even to Europe,” another trader in Singapore said.
Strong product cracks for medium distillates, which have been key in buoying demand for medium sulfur grades, are coming on the back of lean supplies and growing demand for the oil products in the Asia-Pacific region.
The Asian gasoil market has been on a strong footing since the beginning of the year as limited oil product export quotas from China has kept supply in the market tight, sources said.
“I’m hearing that the gasoil market is super tight right now, supply wise… China is not exporting much,” a Singapore-based source said.
China is unlikely to see a second batch of oil product export quotas released in May or even June, according to market sources, preventing refineries from selling gasoil barrels overseas, which could lead to prolonged tightness in the Asian gasoil market.
The supply tightness had been further exacerbated by the war in Ukraine, which has led importers based in Europe to seek gasoil from alternate origins to reduce their reliance on Russian barrels, resulting in a strong pull for Asian gasoil barrels from the West and consequently, lower availability within the region.
Reflecting the increased flows of Asian gasoil to the West, the volume of ultra-low sulfur diesel arriving from East of Suez to Europe rose 12% on month to about 1.66 million mt, according to shipping fixtures and data reported by S&P Global reported earlier.
“We are still seeing AG/West Coast India [gasoil] going to Europe; not so much from Asia,” a regional gasoil trader said May 18.
Meanwhile for jet fuel, a deeply negative regrade spread has been incentivizing refineries to tilt production yields toward co-distillate gasoil, capping production of the aviation fuel, lending strength to the market.
The FOB Singapore front-month regrade swap — the value jet fuel commands over 10 ppm sulfur gasoil — was assessed at minus $6.62/b at the Asian close May 19, down 65 cents/b or 10.88% from May 4, the first trading day of the month, S&P Global data showed.
Recovering demand for both middle distillates as most countries in the region ease domestic and international movement restrictions is further boosting sentiment, leading to robust product cracks.
The physical FOB Singapore gasoil and jet fuel cracks against front month cash Dubai averaged $46.02/b and $31.60/b in April respectively, up from $30.81/b and $22.56/b in March, S&P Global data showed.