ADNOC's March OSPs reasonable but meager spot differentials likely: traders

New York — Spot cash differentials for Abu Dhabi's crude oil grades could remain suppressed in February even as the official selling prices of these grades were kept mostly unchanged from the previous month, trade sources told S&P Global Platts on Feb. 9.

Abu Dhabi National Oil Company on Feb. 8 set the March OSP for its flagship Murban crude oil unchanged from February at Platts Dubai plus 75 cents/b and also kept the differentials for Umm Lulu and Das Blend, against the Murban OSP, unchanged at minus 5 cents/b and minus 35 cents/b, respectively. The producer, however, lowered the March OSP of its medium sour Upper Zakum by 5 cents/b, putting it at parity to the Murban OSP.

Market participants surveyed by Platts in the week ended Feb. 6 had expected ADNOC to make minimal changes to its OSPs from February levels, in line with Saudi Aramco's move.

"Not a bad move as they are following Saudi footsteps. DME has narrowed by approx. 16 cents/b so these crudes [which are not benchmarked] to DME should drop by around 8 cents/b in my opinion," said a trader with a South Asian refinery.

While the March OSPs were largely within market expectations, traders expect spot differentials to remain weak given the bleak demand cues from Asia so far.

"These OSPs still make the grades expensive for some buyers so expect cargoes to trade in the spot market at discounts," a trader with a North Asian refinery said.

In January, demand from key Asian buyers - India, China, Japan and South Korea - remained weaker than previous months as several regional economies renewed their fight against a resurgent virus, squashing domestic product demand and prompting refineries to opt for turnarounds amid depressed margins.

"Upper Zakum surely needed that cut in price but overall demand still looks weak. Wonder how spot differentials will be this month," said another trader with a South Asian refinery.

With a rally in oil prices over the past few weeks, the lack of supportive demand from Asia could shred sentiment leading to a swing in spot differentials from high premiums to sharp discounts similar to the previous month, traders say.

"In terms of spot trades it could move between small premiums to small discounts. Activity does not seem very strong to support big differentials," said a trader in Singapore.

Eyes on Chinese, Indian demand

While Japan and South Korea display a weaker appetite for crude imports, the wider market expects China and India to sustain demand for Middle Eastern crude.

Indian Oil Corp. recently purchased three-million barrels each of April-loading Abu Dhabi's Das Blend, Murban and Upper Zakum crude. The country's largest refiner issued another tender for the purchase of March and April loading crude from various regions including Middle East in a tender that will close Feb. 10 with next day validity.

"The IOC tender will be a litmus test to prove which are the most economical grades. Let's see if they buy Middle East crude again," said another trader in Singapore.

Meanwhile, Chinese buying patterns have remained relatively quiet since last month compared to previous months when the country made voluminous purchases of crude oil.

However, with curbed domestic mobility and upcoming Lunar New Year holidays, buying activity is likely to remain sluggish for most of the month.

"[I] think China may buy only after the holidays. Although the Covid-19 cases are improving and sentiment is more optimistic than January, [I] don't see a lot of demand," said a crude oil trader.

Second month gasoil cracks averaged at $6.80/b so far in February, up from $6.05/b in January and the highest since March 2020 while naphtha cracks averaged minus 15 cents/b in February to-date, hovering close to the three-month high of 12 cents/b in January.

Meanwhile, ADNOC has informed its term customers of reduced nominations for all four crude grades in March with Upper Zakum and Murban both cut by 15%, while Umm Lulu and Das Blend cut by 10% and 20%, respectively, sources said.

With both ADNOC and Saudi having issued their OSPs, the market was waiting for Qatar Petroleum, SOMO and NIOC to issue their respective March OSPs.

"[I] think Qatar Petroleum may cut prices for their grades as they did not move much last month but not sure what SOMO will do," another trader with a South Asian refinery said.