Asian refiners cold shoulder arbitrage barrels amid unfavorable economics

Refiners in Asia are less likely to seek arbitrage crude from the West amid a widening Brent-Dubai spread, which in turn is expected to boost demand for Middle East crude grades as spot trade for March-loading crude kicks off, sources told S&P Global Platts Jan. 19.

A widening Brent-Dubai spread remains a key reason for buyers in Asia to shun arbitrage barrels and instead turn to regional grades to fulfill their crude requirements, traders said.

The March Brent-Dubai Exchange of Futures for Swaps spread average $3.60/b month-to-date compared with $2.94/b for the whole of December 2021, Platts data showed.

The Brent-Dubai 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 with Brent-linked ones.

"I think for Asian refiners, there's no option [and they] have to buy some volumes from PG [Middle East as] arbs are strong," a trader with a South Asian refinery said.

India, a regular buyer of arbitrage crudes especially from West Africa, has also shifted focus to Middle East grades this month, the trader said.

"I find IOC [Indian Oil Corp.] buying lesser WAFR [West African crude]. This tender also [IOC] bought Murban [but earlier] entirely it used to be WAFR only," the same trader said.

In two recently closed tenders this month, the Indian refiner bought 4 million barrels of West African crude, 3 million barrels of Murban crude and 1 million barrels of Brazilian Tupi for delivery in March, according to tender data compiled by Platts.

Mixed outlook on delivered WTI Midland

Up until the Asian close on Jan. 18, the NYMEX WTI-ICE Brent crude spread averaged minus $3.06/b this month, narrower as compared with the December 2021 average of minus $3.30/b, Platts data showed.

A narrower spread indicates that it may be less viable for US WTI Midland crude to be shipped to Asia as compared with other crude alternatives.

However, April delivery barrels of US WTI Midland crude were heard to have changed hands at a premium of $5/b to Platts Dubai on a DES Northeast Asia basis, traders said. The deal could not be immediately verified by both counterparties.

"[The trade] means around high-$2s/b [to Dated Brent, DES], still cheap compared to WAF [cargoes]," a Singapore-based crude oil trader said.

Market participants are also awaiting the issuance of Taiwan's CPC Corporation's monthly sweet crude tender, which is expected to be issued later this week. The tender could provide clarity as to the current value of the grade.

Last month, CPC bought 2 million barrels of WTI Midland from a trading house for March delivery at a premium of around $2.20/b to February Dated Brent, CFR Taiwan, traders said.

Arbitrage barrels headed for private refiners

While some barrels of US grades were heard to have been sold to China's Unipec recently, these shipments were more likely to cover private refiners, market sources said.

"They are stocking up for the independents whom they took over to supply," a trader in Singapore said.

Around 11 million barrels of various February-loading crude grades, including the US' WTI Midland and Mars, were heard to have been bought by Unipec, though refinery sources said these volumes could have been locked in prior to the widening of the Brent-Dubai spread.

China's private refiners have had to trim their run rates due to government scrutiny, emission curbs ahead of the upcoming Winter Olympics as well as slashed crude import quotas, sources said.

"I think [Unipec] will provide them to teapot refineries and hearing those refineries going to ramp up their runs after the Olympics," a shipbroking source said.

A source with a state-owned trading company said Unipec has been sourcing crudes for independent refinery Beifang Asphalt Fuel for the past half a year, mostly for grades from the Persian Gulf regions, with ESPO included most recently, he added.

Unipec has bought about three VLCCs of Mars in the current trading cycle, although it was unclear if these were all headed for the independent refinery, the source said.