Asian winter demand, cost benefit set to push up ESPO Blend crude premiums in Dec: traders

Russian ESPO Blend crude premiums are expected to rise further for December-loading cargoes backed by Asian winter demand, firm buying interest from trading houses and cost benefits of short-haul cargoes, trade sources told S&P Global Platts.

Traders are expecting December-loading ESPO Blend premiums to trade higher than November's $4-$4.5/b, with a few seeing it around a premium of $4.5-$5/b to Platts front-month Dubai crude assessments.

"I cannot see it come off," a trader in Singapore said. "I can only imagine if the [Chinese import] quotas come, this will shoot up so much."

Chinese independent refineries may get the next batch of quotas after the Golden Week holidays leading to a buying spree for crude arriving before the year ends, traders said.

"You are talking about teapot market. They want cargoes to arrive by end December. If there's demand then [premiums for] first half December [loading cargoes] should be good," another trader in Singapore said.

Reflecting stronger demand from China in December, premiums of other independent refinery preferred grades such as Tupi, have also strengthened.

"It's tricky for arbitrage crude [as] we [are] trading November loading [cargoes] and [it's hard for the crude] to arrive end December. You are only left with grades like ESPO," the second trader said.

In September, December-arrival barrels of Tupi crude were assessed at an average premium of $4.46/b to Platts Dubai, DES Qingdao, higher from an average premium of $3.49/b to Platts Dubai for November-arrival crude, Platts data showed.

Traders still keen

Last month, several trading houses bought ESPO Blend crude and could continue this month too, sources said.

"Doesn't matter, quota or not, the demand on the ground will translate to crude runs," the first trader said explaining why trading houses paid higher premiums for the grade.

Diminishing Chinese product stocks ahead of the winter season could further foster buying sentiment for ESPO, market participants said.

"In China the retail network of SOE [state owned enterprises] already ordered to not trade product out and stock [is] too low. That's enough to tell you they have run too low," the first trader said.

Japan and South Korea may also have to stock up on energy supplies as gas and coal prices spiral, several sources said.

"I think even Japan or Korea should have good demand for ESPO/Sokol. The fact that product is dangerously low, we could have problem with a cold winter," the same trader said.

Close proximity to Russia helpful

Meanwhile, Chinese refiners may prefer small cargoes from Far East Russia due to costlier long haul voyages and fears of year end port congestion, shipping sources said.

Cargoes of ESPO crude are loaded in volumes of 700,000 barrels.

"VLCC freight is getting higher as well," the first trader in Singapore said indicating lower incentives to buy crude loading in the Middle East and the West.

The Middle East-Far East VLCC rate was assessed at $7.96/mt on Oct. 6, up from the lowest for this year at $5.25/mt on March 19, Platts data showed.