Spotlight: Limited buying appetite from China has resulted in a consistent downtrend in ESPO crude differentials

This Spotlight from S&P Global Platts Analytics was first published August 19.

Surgut sold 6 October loading cargoes FOB Kozmino via tenders at premiums of 30 cents/b to 50 cents/b versus Dubai. This compares with last month, for September, done at premiums between $1.30-$1.70/b and $3.50/b for August loaders.

Buyers of October cargoes were western trading houses and not the usual Chinese independent refiners, as limited margin recovery, approaching quota limits, and mostly port congestion in China have reduced ESPO buying appetite from baseload buyers in recent months.

Spot differentials for most sour crude grades continued to trade at discounts versus Dubai, or against the grades' respective OSPs. October-loading Al-Shaheen traded at a discount of 61 cents/b against Dubai on a FOB basis. This is much lower compared with the previous month when September-loading Al-Shaheen traded at an average premium of $1.46/b.

Chinese port congestion continues to keep oil in floating storage at extremely high levels. Platts Analytics believes that idled crude cargoes in Chinese waters remain around 100 million barrels.

Dubai Intermonth spreads remain stuck in contango as sentiment still leans toward the bearish side. The 12 month average contango on the Dubai forward curve is around 30 cents/b/month.

There is also pressure coming from arbitrage US crude cargoes as Chinese oil refiners have returned to buying US crude oil for September loading and the expected volume may exceed the last peak buying spree seen in May. Platts Analytics believes that at least 10 VLCCs will be scheduled for September loading in the US Gulf Coast with China-bound cargoes.