Asia condensate, oil product suppliers consider $0/b price floor to limit losses

Singapore — Ultra-light crude oil and oil product suppliers across Asia are looking at implementing measures to mitigate losses should some product prices fall into negative territory, and also cope with price volatility.

Crude oil and condensate buyers are keen to accept the clause to set a trade settlement price floor at $0/b in order avoid negative outright price deals since it's also in their best interest not to sell refined products in minus values, an official at the Korea Petroleum Association based in Seoul said.

"We are trying to look at possibilities to reduce our exposure in exports -- there should not be a cash outflow if I am exporting," said a source at an Indian refiner.

"Because of concerns that AG prices would go further down, we thinking of implementing a zero clause, which crude traders have begun introducing," the source added.

Such a clause would protect the seller from having to pay the buyer in a scenario where the cargo price drops into negative territory, said traders.

While negative pricing was yet to become a reality for naphtha cargo prices, condensate prices were approaching such a situation, said sources.

"The naphtha FOB AG [Arab Gulf] cargo is still around $50/mt so there is no need to put that kind of clause yet, but for condensate we have already seen it as there is a risk the price can go negative since cash differentials are around minus $15-16/b and crude is close to that around $20/b -- the price is still positive so buyers don't hesitate to input the clause," said a trader with a North Asian refiner. Arab Gulf is more commonly known as the Persian Gulf.

Australia's flagship North West Shelf condensate was assessed at a discount of $14.25/b to Dated Brent Wednesday, marketing the lowest price differential since Platts launched the assessment of the ultra-light crude oil on December 16, 2008.

Platts physical sweet crude benchmark Dated Brent averaged $31.83/b in March and $18.48/b month to date, Platts data showed.

"Buyers would have to accept a zero clause too because they also [can be negatively impacted by it] and have exposure to [market volatility on prices]," the Indian refiner source said.

"Asian refiners often export products back to the original feedstock supplier countries. Both crude oil and oil product sides wouldn't want negative price trades," a trading manager at GS Caltex in Seoul said.

Rising freight, falling oil

Middle East and Indian refiners often sell their products based off a formula related to Mean of Platts Arab Gulf assessments, which may be a netback from delivered assessments Singapore or Japan.

On naphtha, FOB AG cargo prices are assessed as a freight netback from C+F Japan cargo price. There has been a significant upswing in freight cost, pushing FOB AG cargo prices below the transhipment cost, Platts data showed.

As a result, cargo sellers were also considering widening their pricing period to reduce the impact of sudden price swings in the volatile market.

"Indian refiners are thinking to change the pricing period to 15 days or month average instead of five days around the bill of lading [because of the price volatility]," said a source with an Indian refiner.

Naphtha FOB Arab Gulf cargo fell to $53.185/mt on Tuesday's Asian close, an all-time low since Platts began publishing the assessment over four decades ago. The price has since rebounded to $56.305/mt at Wednesday's Asian close as crude futures edged up CFR Japan cargo prices.

The benchmark Long Range I Arab Gulf to Japan naphtha freight netback was assessed at a record high of $131.32/mt at Wednesday's Asian close, and has also been higher than the FOB AG cargo cost for the first time on April 21. This has raised concerns that FOB AG naphtha prices may get pushed to negative territory.

"Crude falling and freight rising is the worst-case scenario for FOB suppliers coming true," said a UAE-based naphtha trader.