Feature: Australia's diverse crude quality shields its oil export earnings from volatile Asian cracks

Singapore — Australia's ability to produce both ultra light and heavy crude oil may prove beneficial in protecting the country's overall crude export earnings against volatile Asian refining margins, as regional fuel producers increasingly rely on Australian feedstocks for a wide variety of oil products.

Asian refiners have witnessed wild swings in crack spreads for various oil products so far this year, due to transportation restrictions to contain the spread of the coronavirus, as well as the implementation of IMO 2020, which capped sulfur content on all marine fuels at 0.5% from Jan. 1.

As a result, price differentials for various crude grades actively traded in the Asia Pacific market also registered high volatility.

Unlike many Middle Eastern producers that mainly export medium sour crude grades and US suppliers that mostly market light sweet crudes, Australia is well-positioned to weather the heightened volatility in Asian refining margins as it is capable of catering to regional refiners requiring high quality feedstocks fit for both light and heavy distillates.

Over the Australian 2018-2019 (July 1 to June 30) financial year, the country had exported a total of 136.77 million barrels of crude and other refinery feedstocks, and fetched A$13.6 billion in total value, equivalent to an average of $69.61/b sold after taking into account the Australian/US dollar exchange rate of 0.70 at the end of the financial year.

The average sales value of $69.61/b was above the international physical sweet crude benchmark Dated Brent's average of $69.02/b during the same period.

The outright export earnings are estimated to drop below the A$10 billion mark in the 2019-2020 financial year due to the sharp decline in outright benchmark oil prices following the COVID-19 pandemic, according to a survey of commodity analysts at Westpac, Commonwealth Bank of Australia and ANZ conducted by S&P Global Platts.

The current financial year's export earnings on a dollar-per-barrel basis should, however, outperform the benchmark crude price, thanks largely to consistent spot premiums paid for Australia's low sulfur heavy crude grades, according to the survey participants and traders based in Singapore.

Australian heavy sweet grades broadly maintained spot market premiums over the past year, supported by Asia's consistent demand for low sulfur bunker fuel blendstock.

The country's heavy sweet grades, including Pyrenees and Van Gogh, are widely considered one of the best feedstocks or blendstocks for making IMO-compliant marine fuels.

Earlier this year, Australian oil and gas producer Santos sold a 550,000-barrel cargo of Pyrenees crude for loading over March 4-8 to a Japanese buyer at a premium of around $31/b to Dated Brent on an FOB basis -- the highest premium on record for the grade.

VINCENT QUALITY IMPROVEMENT

Apart from Pyrenees and Van Gogh crudes, demand from the marine fuel oil sector for another Australian heavy sweet grade Vincent rose sharply recently as a result of an improvement in the quality of the crude, which makes it suitable for blending into low sulfur fuel oil.

Industry sources indicated that the flash point of the crude had been improved to make it blender friendly.

"Woodside is always seeking to maximize the value of its production. Vincent crude is already very well-suited to the fuel oil blending market, but we are making adjustments to ensure the grade's competitiveness in this premium-priced segment," an official spokeswoman from operator Woodside Energy said.

Price differentials for Vincent crude against Dated Brent averaged $3.06/b to date this year, and it was assessed at a premium of $5.60/b on June 23, Platts data showed.

CONDENSATE PRICE RECOVERY

Australia is also poised to reap the benefits of the sharp recovery in Asian light distillate refining margins, as the country serves as Asia's top three condensate suppliers.

More than one third of Australia's total crude exports comprise ultra-light grades, including North West Shelf and Ichthys, which are highly sought after in Asia for petrochemical production and gasoline blending purposes.

Although most of the Australian condensate grades were sold at steep discounts over the past few trading cycles amid poor gasoline and naphtha refining margins in Asia, the rapid recovery seen in light distillate products this month triggered a sharp rebound in Australian ultra-light crude prices.

FOB Singapore 92 RON gasoline and naphtha crack spreads against second-month Dubai crude swaps plunged to multi-year lows of minus $9.16/b and minus $12.76/b, respectively, during March and April. However, the crack spreads staged a strong rebound, averaging $2.85/b and minus $2.73/b, respectively, to date in June, Platts data showed.

Price differentials for NWS condensate subsequently bounced back from their lows seen in April and May. Platts assessed the ultra-light grade at a discount of $1.25/b to Dated Brent on June 23, a sharp recovery from a record low of minus $14.6/b on May 6.