ANALYSIS: Asian demand, Middle East OSPs to support Russian crude differentials

A sharp increase in crude prices by Middle East producers this month, alongside strong winter demand in north Asia, is likely to boost premiums for Far East Russian crude grades, traders told S&P Global Platts.

Differentials for ESPO Blend, Sakhalin and Sokol crudes against benchmark Platts Dubai would likely find additional support from Dubai futures widening discount to Brent, which makes Dubai-linked Russian grades more appealing to buyers.

The Brent-Dubai Exchange of Futures for Swaps, a key measure of the relative strength of Brent-linked crudes versus Dubai-linked ones, has averaged $5.18/b in November to date, up from $4.26/b in October, according to Platts data.

"This month Sokol should be strong. South Korea and Japan demand are good, EFS is wide and arbitrage grades' costs are higher," said a Singapore-based crude oil trader.

The Asian sour crude complex has continued to strengthen this month with benchmark Dubai's premium to front-month Dubai futures averaging $3.55/b in November so far compared with $2.42/b for October, Platts data showed.

"Everything is strong. ESPO will not be left behind," the trader said.

The sharp hikes in official selling prices by Middle East producers signal strong demand-supply fundamentals, as OPEC+ sticks to its plan of only incremental increases in production each month.

Bellwether Saudi Aramco OSPs rose by $1.10-$2.80/b for December Asia-bound crude this month.

January-loading barrels of ESPO crude could trade at premiums of around $6/b or higher as fundamentals strengthen, a trader in Singapore said.

Over September-October, ESPO Blend crude traded at premiums of $4.50-$6/b to Platts front-month Dubai crude assessments, up from premiums of $1.70-$2/b in August, Platts data showed.

Buyers in South Korea and Japan could support trade for ESPO Blend crude this month, market sources said.

"Japanese and South Koreans will show up if prices are reasonable on ESPO," a trader with a Japanese trading house said.

However, traders said the rally in ESPO premiums maybe capped because of weak demand from Chinese private refineries.

Chinese refineries have been dealing with an uncertain outlook for margins amid frequent and widespread lockdowns across several parts of the country due to fresh outbreaks of COVID-19, another trader in Singapore said.

"[Import] quotas is not a problem, they'll definitely have quota," the first trader said. "Checks still ongoing. Margin was good but a small COVID-19 wave will affect demand."

Traders would also be eying arbitrage opportunities for ESPO blend into the US, as Dubai's discount to WTI widens, although higher freight levels in December and January could limit flows, shipping sources said.

The WTI/Dubai spread has widened to $2.83/b at the Asia close Nov. 10, from a low of 30 cents/b Oct. 5, Platts data showed.

Earlier this year, end-users in the US ramped up ESPO Blend imports as China's private-sector refiners put the brakes on crude procurement amid maintenance and high inventories.

Sokol sentiment upbeat

India's ONGC Videsh Ltd. offered 700,000 barrels of Sokol crude for Jan. 8-14, 2022, loading via a tender that closes Nov. 12 with same-day validity, according to sources.

Results of the tender would be closely watched by market participants for fresh cues into the outlook for Far East Russian grades that are set to benefit from robust middle distillate product cracks.

Most recently, OVL sold 700,000 barrels of the middle distillate-rich Sokol crude, which typically has an API gravity of 35.5 and 0.28% sulfur, to a South Korean end-user for Dec. 16-22 loading at a premium of around $5.80/b to Platts front-month Dubai crude assessments, CFR Yeosu, traders said.

The cash premium achieved for December loading barrels reached a 20-month high for the Dubai-linked crude grade, while results on the tender for January loading barrels are awaited.

Gasoil and jet fuel cracks were seen to dip slightly but still maintaining their firm footings on the month, amid COVID-19 vaccine rollouts and recovering aviation and travel industries.

"I guess the cracks are going strong," said the seller.

Second-month gasoil and jet fuel cracks versus Dubai crude swaps have averaged $14.49/b and $13.34/b in November to date, largely stable from $14.68/b and $13.43/b over October, respectively, Platts data showed.