Firm sour crude complex weighs on Asian refiners, but healthy margins support

A strong Middle East sour crude complex continues to churn out increasingly expensive spot crude cargoes for Asian buyers, though robust refining margins remain the redeeming factor, refinery sources told S&P Global Platts.

The Dubai complex soared to a record high in February, as demand for Middle East grades surged and arbitrage crude from the West remained elusive, sources said.

At the Asian close Feb. 16, the Dubai cash/futures spread hit a record high of $4.11/b, Platts data showed.

"Good margins for sure but prices have gone up," a trader with a South Asian refinery said.

Spot differentials for April-loading crude have risen sharply but growing product demand across several key Asian economies such as India, China and Japan are unlikely to lessen the thirst for crude, a trader in Singapore said.

"Although the crude oil price and benchmark structure is strong, product margin is very stable and healthy," the trader in Singapore said.

China could lead the way this month as domestic consumption of oil products remains sturdy, sources said.

"This month, Chinese demand is driven by product margins [as] gasoline demand is good," the same trader in Singapore said.

Meanwhile, in India, the fears over the omicron variant of the coronavirus continued to fizzle out, with greater mobility across the country pushing oil and product consumption higher, the trader with the South Asian refinery said.

"Yeah, margins are good [as] mainly HSD [high speed diesel] and kerosene margins have pulled the overall margins," another trader with a South Asian refinery said.

On the flipside, however, high retail fuel prices in India will pinch refiners, some Indian refinery sources said.

"Whatever margins are there are being hurt by high prices [and] transportation fuel prices are stagnant," the first trader with the South Asian refinery said.

Japan, meanwhile, could also see a pick up in gasoline demand with the onset of the peak summer driving season that kicks off in May, traders said.

Tight supply lifts middle distillate cracks

Even as crude prices soar to fresh highs, refineries remain incentivized to keep run rates high as gains in oil products outpace that of crude, leading to firm refining margins.

The physical crack for FOB Singapore 10 ppm sulfur gasoil against front-month cash Dubai has averaged $17.95/b so far this month till Feb. 17, rising from an average of $15.53/b over January, Platts data showed.

The physical crack for jet fuel/kerosene mirrored similar increases over the same period, with an average of $14.39/b for February, up $2.17/b, or 17.76%, from January's average of $12.22/b.

While reduced oil product exports from China due to tightened quotas continue to place a floor under the middle distillate complex in Asia, market sources attribute the recent strength in the complex to lean inventories and supply uncertainty in the West that is having a knock-on effect in the East.

Reflecting the globally shrinking inventories of middle distillates, stocks of diesel and gasoil in the Amsterdam-Rotterdam-Antwerp hub declined to a near eight-year low of 1.54 million mt in the week to Feb. 16, according to Insights Global data, while Enterprise Singapore data showed the city-state's commercial middle distillate stockpiles were hovering near a four-week low of 7.46 million barrels for the week ended Feb. 16.

Even as supply balances in Europe dwindle to historic lows, the Asian middle distillate complex has responded to the pull for cargoes from the West by pricing competitively regionally to stem East-West arbitrage flows, sources noted.

"Currently the front two months are closed on arbs [East-West arbitrage] ... [due to] strong gasoil in the East as well, pulling barrels to [the] Straits," said a gasoil trader based in Singapore.

Another market participant concurred, adding: "It all depends on how much the buyer is willing to pay ... ultimately the cargo can go anywhere with the right price."

In addition to lean inventory levels in the West, the gasoil and jet fuel complex have been propped up by supply jitters stemming from geopolitical tensions between Russia and the West, as an escalation may lead to sanctions on exports of oil products from Russia.

Platts previously reported that tanker owners have started to demand a freight premium for cargoes discharging into Ukraine amid geopolitical worries, after the Ukrainian and Russian waters in the Black Sea and the Sea of Azov were placed under a high-risk category, by the Joint War Committee of the Lloyds Market Association on Feb. 15.