Australia's Sep-loading heavy sweet crude premiums steady despite easing LSFO cracks

Limited supplies of Australian heavy sweet crude grades amid healthy refining margins continue to support spot premiums of September-loading barrels despite a weakening in low sulfur fuel oil cracks, trade sources told S&P Global Commodity Insights July 27.

A 550,000-barrel cargo of Vincent crude, which typically has a gravity of 19 API with 0.15% sulfur, was recently sold by Woodside Energy to an end-user at a premium of around low-to-mid $12s/b to Dated Brent, FOB, traders said.

The traded level was largely steady from the previous trading cycle when an August-loading cargo of the crude was sold at a premium of around $12.50/b to Dated Brent, FOB, the traders added.

"Margins were quite well across the products, supportive middle distillate cracks could have a trickle-down effect for heavy sweet crude [premiums]," said a Singapore-based crude oil trader.

Second-month Singapore gasoil and jet fuel swap crack spreads versus Dubai crude have averaged $45.03/b and $38.95/b, respectively, in July to date, easing slightly from record highs of $56.67/b and $51.01/b in June, S&P Global data showed.

Vincent crude production from Woodside's Ngujima-Yin floating production, storage and offloading vessel totaled 3.67 million barrels in the first half of 2022, up from around 3.28 million barrels in the same period last year, but still lower than the 3.84 million barrels produced in the same period in 2020, according to the equity holder's second-quarter report July 21.

"Higher production [for Vincent crude in 2022 versus 2021] with Cimatti field back, producers will balance the revenue from an increase in production with the loss away from LSFO blending market," said a crude oil trader based in Australia.

Apart from Vincent, it remains unclear if Australia's other heavy crude grade Van Gogh has changed hands, while there are no Pyrenees crude cargoes scheduled for loading in September, traders said.

The traders said there is a single 300,000-barrel cargo of Van Gogh crude scheduled for loading Sept. 1-5 held by oil producer Santos.

The sentiment for these two grades, which are favored by fuel oil participants for blending into low sulfur marine fuels pool, remained upbeat following record premiums earlier in July.

Santos then sold a 550,000-barrel cargo of Pyrenees crude for Aug. 28-Sept. 1 loading to Japan's Marubeni at a record premium of around $34/b to Platts Dated Brent, FOB.

"Pyrenees and Van Gogh [crudes] are the main grades now," said a regional crude oil trader, "the market is seeing some support from the limited available supply."

Tight supply of the grades may limit the impact of easing LSFO values in July, traders said.

The second-month LSFO crack against Dubai swaps weakened to $8.25/b on July 22 from the month's high of $23.11/b last seen July 5, data from S&P Global showed.

"I don't think [LSFO] market will collapse, heavy sweet crudes will continue to do well, the grades that can be used for [LSFO] blending will still see buying activity," said a Singapore-based crude oil trader.

LSFO awaits pricing cues

The Asian LSFO market has retracted sharply in recent days, tracking similar, if not stronger declines seen in the middle and light distillates markets.

LSFO market participants have attributed the bearish sentiment to an uptick in regional flows of low sulfur material. The volume of Western arbitrage inflows of low sulfur material into Singapore for August arrival was estimated to come in slightly lower than for July. However, incremental supply from within the region was expected to cushion the demand-supply balance going into August, traders said.

The cash differential for Singapore 0.5%S marine fuel cargo over the Mean of Platts Singapore Marine Fuel 0.5%S assessments has declined sharply from an all-time high of $85.81/mt reached July 14 to $53.25/mt July 26.

The market structure at the front of the Singapore 0.5%S marine fuel swaps curve has also narrowed from a record-high $83/mt on June 30 to a 10-week low of $30.25/mt on July 25.

Still, the Singapore 0.5%S marine fuel prompt-month market structure settled higher at $38/mt on July 26, and was pegged even higher at $42.25/mt in midafternoon trades July 27, according to data from S&P Global.

Similarly, front-month Singapore 0.5%S marine fuel swap spread to the same-month Brent swap has tumbled from a record-high $38.33/b on June 30 to a near six-month low of $13.35/b on July 22. Margins have since not only retraced some of the losses to settle higher at $16.75/b at the 0430 GMT Asian close July 26, but was also seen trading higher at $17.50/b in midafternoon trades July 27.

The direction that the upstream Asian LSFO market was likely to take in the near term also depended on how margins would continue to fare for cleaner refined products, especially gasoil, traders said.