Regional sweet crude sentiment upbeat despite longer August-loading program

Cash differentials for August-loading barrels of Asia-Pacific sweet crude barrels are poised to maintain firmer footings on the month on the back of resilient middle distillate product cracks, despite a longer loading program seen for Malaysia's flagship Kimanis crude, traders told S&P Global Commodity Insights June 17.

"The demand is there, buyers are ramping up due to good product margins," said a regional crude oil trader.

Seven 605,000-barrel cargoes of Kimanis are scheduled for loading in August, up from five cargoes for July-loading last month, according to traders. The usual cargo size for Kimanis crude is 600,000 barrels.

The difference in cargo size seen for August-loading barrels was to cater for terminal requirements and is unlikely to be a permanent change moving forward, according to a crude oil trader.

The Platts second-month Singapore gasoil and jet fuel swap crack spreads versus Dubai crude has averaged $51.93/b and $46.87/b to-date in June, soaring from $36.52/b and $31.57/b, respectively, in May, data from S&P Global showed.

"Cracks are not coming down, backwardation is too strong," said a crude oil buyer.

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Following the release of Malaysia's Kimanis loading program, Brunei Energy has offered its cargo for Aug. 3-7 loading via a tender which closed on Aug. 16 with next day validity, according to sources.

"You never know how high [the premiums will be], regional gasoil rich [crudes] will be strong, hard to tell value but should be above $1.50/b to [August MCO OSP]," said a crude oil trader.

Earlier in the week, traders were heard to value August-loading barrels of Kimanis crude at a premium of $12s/b to Dated Brent, FOB.

On Vietnamese crudes, traders also await clarity on tender results from PetroVietnam Oil's Chim Sao and Ruby crudes, where cash premiums are expected to rise up a notch this month.

"The market for Ruby is still going strong, and Chim Sao is about $1/b above Ruby," said a regional crude oil trader.

While high freight rates and a backwardation hovering near record highs might impede arbitrage flows to Asia, traders said some refiners might nonetheless choose to tap on West African and Mediterranean cargoes if regional crude premiums are too expensive.

"Compared to last month, production for regional crudes are getting more stable. The cash premiums may increase but not too much," said a crude oil trader.

Demand set to improve

Robust middle distillate cracks are likely to sustain as demand recovery buoys the middle distillate complex, which could keep the medium sweet crude complex in Asia-Pacific elevated.

The Platts FOB Singapore 10 ppm sulfur gasoil cargo and jet fuel/kerosene cargo cracks against front-month cash Dubai have averaged $60.42/b and $49.47/b in June to date, up from $45.31/b and $34.83/b over May respectively, S&P Global data showed, reflecting increasing attractiveness of producing middle distillate barrels.

Product cracks for the two distillates have been hovering at record high levels as most countries in the Asia-Pacific region roll back COVID-19 restrictions to adopt an endemic, vaccine-backed approach to the virus, leading to surging demand for transportation.

Demand recovery for gasoil has also been supported by recovery in the industrial and construction sectors in most countries, as they aim to revive their economy post COVID-19.

While gasoil supply is increasing in Asia as refineries across Asia maximize their gasoil yield to take advantage of lucrative cracks of the distillate, and closed East-West arbitrage lanes keep more Asian gasoil barrels stuck within the region, sentiment in the market remains strong as recovering demand within the region provides sufficient avenues to absorb the increasing supplies.

"I feel like demand will continue to improve in many countries...[and] so will supplies as long as refineries are able to run." said a gasoil trader based in Singapore. "Output will fluctuate more to match the product that fetches the highest margins, so premium level will go up and down for gasoil, [and] low and high premium [level] won't stay long."

Jet fuel sentiment edges positive

Meanwhile for jet fuel, pent up international travel demand has been boosting demand for the aviation fuel, sources have noted.

Additionally, a deeply negative regrade spread has led to refineries in Asia placing a lid on jet fuel production, limiting supply availability of the distillate and further boosting the jet fuel market.

At the Asian close June 16, the Platts Singapore front month regrade swap – the value jet fuel commands over 10 ppm sulfur gasoil – widened to a two-week low of minus $8.40/b, S&P Global data showed. The spread was last assessed lower at minus $11.30/b on May 31, S&P Global data showed.

"Yes, it is true that refiners are maximizing gasoil [output] than jet due to better refining crack margins," a Singapore-based regional trader said, adding that more jet fuel production had previously been expected from North Asia as turnarounds have ended, but that due to some "refiners experiencing some glitches, [there has been] a slight impact on production volume".

The curtailed supply, combined with still viable arbitrage economics to move Asian jet fuel barrels – especially from the Persian Gulf – to Europe, have helped to keep overall supply balances in check, with this coming even as jet fuel demand has been on an uptrend with more airlines adding on to flight schedules and reporting higher passenger traffic numbers by the month.

For the month to date, the cash differential for jet fuel/kerosene cargoes for loading from Singapore averaged a $3.49/b premium to the Mean of Platts Singapore jet fuel/kerosene assessment, S&P Global data showed at the Asian close June 16, higher than the $3.26/b premium averaged over May.