India's fondness grows for Russian ESPO crude, a hot favorite in China

An all-time favorite among China's private refiners, seaborne Russian ESPO Blend crude oil is starting to attract buyers in India, a trend that could intensify competition between two of Asia's top oil importers.

Although Indian refiners have remained tight-lipped about their recent ESPO deals, talk of multiple import deals being sealed by both private and state-run refiners in the country has already lifted premiums for the grade.

"Indian refiners' purchases of ESPO grade have increased substantially recently," said Sumit Ritolia, Senior South Asia Oil Analyst at S&P Global Commodity Insights.

Russian Urals, a medium API sour crude, is the main grade that India normally imports from Russia to replace medium-to-high API and sour grades from the Middle East and low sulfur grades from Western Africa.

"India's renewed buying of ESPO, which is low sulfur, is largely attributed to balancing the refinery crude mix to maintain high refinery throughput and manage the intermediate stocks and ullage positions so that refinery throughput doesn't get affected," Ritolia said.

Trade sources said interest from India for ESPO has started to increase in recent weeks after a few trial cargo purchases in 2022, but it was too early to discern it was a long-term trend until shipment challenges and relatively higher freight costs were addressed.

Price impact visible

Cash differentials of ESPO Blend have soared in recent days following talk of fresh buying from refiners in India, as well as strong interest from China.

Indian refiners are believed to have collectively bought seven Russian ESPO Blend cargoes for April loading, according to trade sources and Kpler shipping data.

While some sources attributed India's buying of ESPO to the disruption in trade flows of Urals crude, others said the recent rebound in the medium sour crude complex might have also spurred refiners to seek alternative Russian grades.

"The challenge in shipping ESPO to India will be incremental freight costs over Urals. So it would depend on discounts at which Indian refiners can manage to seal deals," said an Indian industry leader with experience in handling Russian crude.

Considering the proximity of the Persian Gulf to India, from where cheaper cargoes can be shipped in Aframaxes, corresponding deliveries of the same vessel size from Kozmino will be viable only if there is deep discount to the price cap of $60/b, a VLCC broker said.

However, crude from Kozmino may become quite economical for India if VLCCs discharging cargoes in Far East countries such as Japan and South Korea take ESPO crude via ship-to-ship transfer outside Yeosu for delivery to India, he said.

Brokers said India's emergence as an ESPO crude buyer would provide a boost to the already elevated freight market.

"India is throwing its hat in the ring. There is a dedicated fleet of ships which only cater to moving Russian grades and now there will be demand for another major destination, India," a tanker broker said, adding this would spur greater competition as almost all liftings from Kozmino to date have been by Chinese refiners.

ESPO crude is primarily shipped from Kozmino in Aframaxes carrying around 100,000 mt each. Russia has been consistently exporting more than 3 million mt/month of ESPO crude from Kozmino, with shipments in January climbing close to 4 million mt, according to shipping industry estimates.

Prior to Russia's invasion of Ukraine, Aframax freight from Kozmino to North China was less than $500,000; it has since jumped fourfold to more than $2 million and is set to rise further, one freight broker said.

Platts assessed Aframax freight on the Kozmino-North China route at $2.1 million March 6, compared with $470,000 in the week before the Ukraine invasion in February 2022, S&P Global data showed. A trade source estimated the lumpsum rate from Kozmino to east coast India at $4 million and to west coast India at $4.5 million.

China demand robust

While India is a new buyer of ESPO crude, fresh demand from China is already making a bigger impact on ESPO premiums.

State-run Unipec is believed to have recently bought at least four ESPO cargoes for April, and Hengli Petrochemical, which had not bought any ESPO cargoes in the past few years after commissioning, was also heard to have bought around four to five ESPO cargoes.

"We are eager to take some but may need to compete with other Sinopec refineries as supply is limited while buying interest is strong," a southern China-based refining source with Sinopec said.

Robust demand has seen offers for April-delivery ESPO to China's independent teapot refiners in Shandong at discounts of around $7-$7.50/b against June ICE Brent futures on a DES basis, sources said. This was up sharply from the last trade heard for April delivery at June ICE Brent futures minus $8.50/b, DES Shandong, by an independent refiner.