Crude oil discounts sent to Shandong continue to climb

Crude prices have risen after the Opec+ group of producer countries agreed to add an extra 500,000 b/d of cuts to its current agreement, from 1 January. This, and higher freight costs, have helped pull up premiums for crude traded on a delivered ex-ship (des) Shandong basis.

 

Premiums for all assessed grades rose by $0.30/bl over the week of 5-11 December with the exception of ESPO Blend premiums to Ice Brent futures. The Russian grade's premium has risen by $0.80/bl to $7.75/bl on 11 December, after buyers began to hunt for February-arriving cargoes priced against the Ice April Brent contract. The ESPO Blend premium's increase compensates for a $0.80/bl discount between March and April Ice Brent contracts. But the February ESPO Blend loading programme has not yet emerged, and sellers are proving reluctant to sell the grade short into the Shandong market at premiums below $8/bl.

 

Refining margins in Shandong are still higher for ESPO Blend than for competing distillate-rich grades Lula or Congolese Djeno. ESPO Blend's gross product worth (GPW) margin is estimated at $3.50/bl, compared with $3.25/bl for Lula and $1.69/bl for Djeno.

 

Holiday spirits

Spot traded crude volumes nearly doubled in the week of 5-11 December, to 17.7mn bl from 9.4mn bl in the week of 28 November-4 December, as independent Chinese refiners snapped up cargoes ahead of the Opec+ meeting on 6 December. They have broadly covered themselves for January feedstock purchases — buying less than the hefty 1.7mn b/d they bought for December — and are buying for February delivery now.

 

Brazil's Lula remains the most-traded grade. There are few Lula cargoes still available for delivery to Shandong although many have been bought by trading companies, and may be re-sold on a des Shandong basis.

 

Norwegian Johan Sverdrup continues to make rapid gains into the Shandong market — receipts of 250,000 b/d look likely to overtake deliveries of Russian light sweet Russian ESPO Blend next month. Refiners have already bought 150,000 b/d of Sverdrup for February and 70,000 b/d have traded for delivery in March (see graph).

 

China's January crude purchases have been relatively strong, although lunar new year public holidays falling at the end of the month have encouraged refiners to frontload purchases. This is likely to have been a factor in helping pull up freight rates for 2mn bl very large crude carriers (VLCCs) — freight markets are fixing December-loading vessels for the Mideast Gulf, and January-loading vessels from west Africa. But the looming transition to low sulphur bunker fuels is another factor. The International Maritime Organization has set a global marine fuel cap at 0.5pc sulphur beginning in 2020.

 

Freight factor

Many shipowners have dry-docked vessels to be retro-fitted with sulphur scrubbers which will allow them to burn very cheap high-sulphur fuel oil, keeping overall fleet availability relatively tight. But west Africa-China freight rates have risen by $0.74/bl to $4.57/bl in the past week, by more than other routes, taking them close to the — usually higher — cost of sending a VLCC from Brazil to China. Vessel owners are reluctant to load in west Africa, concerned that the region's frequent loading delays could leave them burning fuel that is not compliant with the sulphur cap.

 

The relatively high cost of west African freight is discouraging sellers from sending grades such as Djeno east. Only one cargo of the medium sweet Congolese grade has traded so far this month and supplies are tight with just one cargo on offer for February delivery.

 

Source:Argus