March-loading Russian crude differentials to Asia under pressure amid weak margins

Cash differentials for mainstay Russian crudes to Asia – including ESPO blend, Sokol and Sakhalin Blend – are likely to trade at steady-to-lower differentials on the month for March-loading or April-delivery cargoes, as weakening margins and regional turnarounds weigh on demand, trade sources said.

March-loading ESPO blend crude cargoes have been heard valued at a wide range this week, from $1/b discounts up to a premium of 50 cents/b against May ICE Brent, DES Shandong. In comparison, February-loading ESPO blend cargoes last traded at flat to a discount of around 50 cents/b to April ICE Brent, DES Shandong.

On a FOB basis, Russian producer Surgutneftegas was heard tentatively offering March-loading ESPO blend cargoes this week at discounts of around $2.50-$3/b to Platts Dubai crude assessments, though traders have noted little buying interest at these levels.

Sources at Chinese independent refiners have reported weaker margins in recent days, as well as price competition from similar grades such as Iranian light, though differentials for these too have been rising.

Data from local energy information provider JLC showed that the refining margins fell to Yuan 130 ($18.3)/mt as of Jan. 24, down from Yuan 255 ($35.9)/mt a week earlier, due to increasing production costs and lower prices for refined oil products.

"The expectation for future demand not so optimistic. The processing profit is not so steady and not so attractive," a source at a Chinese independent refiner said.

Any support for the grade will likely come from rising prices for Iranian crude -- in particular Iranian Light, which carries a similar light distillates yield to ESPO blend. Iranian Light was one of the main medium, sour crude grades that Chinese independent refineries bought in hefty volumes in 2023.

This month, February-arrival Iranian light crude was heard sold into Shandong at discounts of around $5/b to ICE Brent, sources said, up sharply from discounts of $12-$13/b against ICE Brent in late October.

"Compared to Russian oil, it is still cheaper," a second Chinese refinery source said.

S&P Global Commodity Insights earlier reported the volume of Iranian crudes flowing to China's small independent refineries in 2024 are likely to be similar to the volume of imports in 2023, due to tight supply of Russian and Venezuelan crudes.

Sokol, Sakhalin

Sokol crude, another of Russia's mainstay crude grades to Asia, was heard valued by Chinese independent refiners this week at discounts of $0.50-$1/b against ICE Brent, DES Shandong, for April-delivery cargoes, steady to lower from deals done for March-delivery cargoes at flat to a $1/b discount to ICE Brent, DES Shandong.

The grade, typically taken by Japanese or South Korea refiners prior to the Ukraine war, is now regularly sold to Chinese or Indian refiners these days.

Sokol, which has a lower sulfur content of around 0.28% and a lighter API gravity than ESPO blend, is not as popular with Chinese independent refiners due to its sweeter, lighter quality and hence more expensive value.

In 2023, around 1.4 million mt of Sokol was imported by Chinese independent refineries, versus 29.2 million mt for ESPO, according to S&P Global data.

"Sokol has been a bit cheaper [compared to last month] but only limited cargoes for sale," said a refinery source.

The grade has been in the limelight this month after a payments issue between India's IOC and Russian producer Rosneft in late-December led to the cargoes being briefly stranded in waters around Singapore. Sources said those cargoes have now been diverted to China's Shandong after finding new buyers among the region's numerous independent refiners, with the cargoes heard sold at discounts in the $4s/b against ICE Brent, DES.

Historically, around six cargoes of the Sokol crude are offered per month, with some of the cargoes purchased by India-based end-users via term arrangement, sources earlier said.

"At ICE Brent minus $1s/b, I don't see [Sokol] cargoes landing in India as that is going to be quite expensive, with freight being a lot cheaper to China versus India," said an Asia-based crude trader.

Meanwhile, April-delivery cargoes of Russia's Sakhalin blend crude, which has a gravity of 45.5 API and a much higher light distillates cut compared to Sokol or ESPO, was valued around $3/b to $4.50/b lower compared to ESPO blend.

"It depends for different refineries, complex refineries may value it higher but for the teapots in Shandong, the value difference should be around $3/b-$4.50/b below ESPO," said a Singapore-based trader.

Trade activity for ESPO blend, Sokol and Sakhalin blend crude is set to pick up in the coming days, with price levels expected to become clearer as a result.