Mainstay Asian sweet crudes have brushed aside shrinking margins to trade at their highest premiums in over six years for the January trading cycle, supported by rising demand from refineries to produce IMO-compliant low sulfur fuels and a closed arbitrage, Asian sweet crude traders said Thursday.
Malaysia’s Petronas recently sold a January-loading cargo of Labuan crude, one of its key basket grades, at a premium of around $8.90/b to Platts Dated Brent, FOB, traders said.
S&P Global Platts has not assessed Labuan crude this high since October 14, 2013, when it was at a premium of $9.30/b to Platts Dated Brent, FOB.
In Vietnam, PV Oil sold a January-loading Chim Sao crude cargo earlier in November at a premium of around $7.25/b to Platts Dated Brent, FOB.
Platts does not assess Chim Sao, but Vietnam’s Su Tu Den crude, a comparable grade, was last assessed higher on June 27, 2012, at a premium of $8.07/b to Platts Dated Brent, FOB.
While Asian sweet crudes prices have been buoyed throughout 2019 by the upcoming 0.5% sulfur cap on marine fuels starting January next year, the effect so far has been isolated to the heavier grades.
Heavy, sweet Australian and Indonesian crudes, for instance, has seen some cargoes trade at record high differentials this year, due partly to their ability to be directly blended into the low sulfur fuel oil pool.
But with the deadline for IMO 2020 nearing, supply of Asian heavy sweet crudes limited and rising freight rates curbing the flow of arbitrage cargoes, crudes at the lighter end of the spectrum are feeling the effect as well.
Malaysian crudes are typically light and sweet, yielding more than 50% of middle distillates on refining. Vietnamese crudes are waxy and known for their rich yields of vacuum gasoil.
Further from Asia, December-loading cargoes of some Nigerian crudes, usually light and sweet in quality, have seen differentials jump by close to $2/b over November, partly on demand from refiners for IMO-compliant crudes, traders in the West African crude market said.
“We initially thought that the split from IMO would be between sweet and sour crudes, but that later turned out to be between heavy and light crudes,” one trader said. “Now we’re seeing lighter crudes performing very well too,” the trader added.
MARGINS FALL SHARPLY
The high premiums fetched for January-loading cargoes comes even as margins have fallen sharply in recent weeks, with some even turning negative.
Refinery margins on a cargo of Malaysia’s Kimanis crude have averaged $2.60/b for the month to date for a medium complexity cracking refinery in Southeast Asia, down $2.30/b from the October average, Platts Analytics data showed.
For the North Sea’s Forties crude, margins have averaged minus 69 cents/b for the month to date, down from plus 95 cents/b for October.
However, depending on whether refineries are able to convert their residual output into IMO-compliant low sulfur marine fuel, actual refinery margins could be higher.
The M2 swap spread between Singapore Marine Fuel 0.5% and 380 CST high sulfur fuel oil has climbed throughout 2019 and hit a record high of $40.58/b Wednesday, Platts data showed.
Meanwhile, rising freight rates in recent weeks, as well as a strengthening Dated Brent structure, has meant that arbitrage cargoes to Asia from West Africa and the US have been difficult to work.
VLCC rates on the West Africa-Far East route touched a six-week high of $36.26/mt Tuesday, up more than $10/mt from since mid-November, Platts data showed.
“Margins are negative but this is IMO. No one wants to short and VLCC rates from West Africa are expensive, so the arbitrage is closed,” a source at an end-user said.