Russian ESPO Blend premiums reach 5-month high in May amid China demand optimism

Premiums of Russia's ESPO Blend crude rose to multi-month highs in the current month amid expectations that Chinese refineries may look to maximize their middle distillate production following the implementation of an import tax.

Recent tenders for July loading ESPO crude by Russian oil major Surgutneftegaz traded at premiums of between $2.95/b and $3.50/b in May as against Platts Dubai crude assessments, FOB, the highest since December 2020 when they traded at premiums of $3.20-$3.30/b, S&P Global Platts data showed.

While the cargoes were heard to have been sold to trading houses and oil majors, traders indicated that there were expectation that demand could emerge from China for middle distillate-rich crude oil grades following the government's surprise move to levy a consumption tax on imports of light cycle oil, mixed aromatics and bitumen blend.

Additionally, arbitrage barrels from the West have turned expensive which in turn has attracted demand for ESPO blend from trading houses, said a crude oil trader in Singapore.

"Arb [Arbitrage] barrels are not cheap while all the majors and traders are betting that buyers will come to them [for ESPO]," said the trader in Singapore.

China's domestic gasoil demand to rise

China, a key consumer of the Russian grade, could seek to ramp up its crude purchase momentum to increase domestic production of middle distillate products, traders said.

"I think most refineries will try to increase run rates, using crude that can yield higher [middle] distillates. We are already seeing that happening now," said a second trader based in Singapore.

As light cycle oil is used as a gasoil alternative in China -- most commonly used in the mining, construction, fishing, industry and agricultural sectors -- the upcoming tax could result in domestic demand shifting back to the gasoil pool, with several observers noting that Chinese refineries will likely cut gasoil exports to ensure sufficient domestic supplies.

In addition, some traders also observed that gasoil in China would be entering into a seasonal peak demand period, with consumption levels from the agricultural and construction sectors typically robust over the second and third quarters of the year. Moreover, demand is expected to increase further when the fishing ban in the South China Sea is lifted by mid-September. The annual fishing ban began on May 1, aimed at protecting marine resources and the ecological environment.

Platts data showed that Chinese gasoil exports have been holding at robust levels since the start of the year, but sources said the situation is likely to change with refiners now preferring to keep barrels for the domestic market.

China's customs data showed that gasoil exports over January and February were each at 1.72 million mt, rising to 2.72 million mt in March, and hitting a multi-month high of 2.81 million mt in April. May gasoil exports from the major supplier are currently hovering at estimates of 1.89 million-2 million mt, according to traders and analysts.