Chinese private refiners extend arbitrage purchases, raises Canadian sour crude demand

China's independent refiners are continuing to eye arbitrage crude in the current March-delivery trade cycle, which is driving new demand for Canada's heavy sour crude following the expansion of the Trans Mountain pipeline, market sources told S&P Global Commodity Insights Dec. 20.

In the week ended Dec. 20, Mega independent refiner Shenghong bought a 550,000-barrel cargo of Cold Lake for March delivery at a discount of around $4/b to the mid $4s/b to May ICE Brent futures, on DES basis, market sources said.

This marks the first time crude from the expanded Trans Mountain pipeline was heard sold to the 320,000-b/d (16 million mt/year) refinery at east China's Lianyungang.

Another independent refiner was also considering purchasing a cargo of Cold Lake, but at a wider discount from the traded level, market sources said.

Rongsheng bought three 550,000-barrel cargoes of Access Western Blend this week for March delivery at a discount in the high $4s/b to $5/b to May ICE Brent futures, DES Zhoushan as part of its usual purchase for its 800,000-b/d Zhejiang refinery.

Interest for Canadian crude has risen among some Chinese refiners due to expectations of more heavy sour Canadian crude being diverted from the US West Coast to Asia following US President-elect Donald Trump's proposed 25% tariffs on US imports from Mexico and Canada.

Medium-heavy sweet Brazilian crude was also heard offered into Shandong, though independent refiners deemed the offered prices too high.

Buzios and Tupi, for example, were valued at premiums in the low-to-mid $2s/b to February Dated Brent, DES, with one trader noting weak interest among the refiners.

On West African grades, Yulong Petrochemical was heard to have purchased earlier in December a total of 2 million barrels of Angola's Dalia crude for end-February to early March delivery at a premium in the low $2s/b to Dated Brent, DES, extending independent refineries' buying streak.

Angola's Saturno was last heard offered this week at premiums in the low $2s/b to $2.40/b against May ICE Brent futures on DES basis for March delivery.

"Volume [is] still limited," another trader said on the recent purchases.

A third trader said arbitrage economics for independent refiners is not very favorable as margins remain razor thin, adding that the recent purchases were driven by tighter Iranian supply and the need to meet baseload demand around the Lunar New Year. A seasonal demand uptick further down the trade cycle could also pull more West African grades back to Northwest Europe, the trader added.

"They [independent refiners] will take West African grades in the short term... I think after April, they will go back to normal sanctioned crude because regular crude [prices] will go back up," the trader said.

Lofty offers on sanctioned grades

China's interest in arbitrage volumes of these origins also comes amid sanctioned Russian and Iranian grades being offered at higher cash differentials.

Russian ESPO grade was heard offered over the week ended Dec. 20at premiums of $2-$2.10/b to Platts Dubai assessments, DES, and at premiums in the high $1s-$2.10/b to April ICE Brent Futures, DES, for February delivery. Sokol was valued at the same premiums.

The offers on ESPO were up from the last trades at a premium of $1.30/b to March ICE Brent futures, DES for January delivery, despite a slowdown in purchases by state-owned entities.

While the rise in premiums priced against ICE Brent futures was in part due to a narrowing Brent/Dubai spread, discounts for ESPO on FOB basis had also narrowed, reflecting more ESPO and Sokol cargoes set to be diverted to India.

Russian producer Surgut was heard to have sold in mid-DecemberFebruary-loading ESPO at discounts of $1.50-$2/b to Platts Dubai assessments on FOB Kozmino basis, versus discounts in the $2s/b for January.

Overall ESPO supply was estimated at around 35 cargoes for loading in February (925,000 b/d), compared with 37-38 cargoes for January (883,000-907,000 b/d), according to trade sources.

The Platts-assessed Brent/Dubai swap spread narrowed to 26 cents/b for February at the 0830 GMT Asian close Dec. 19 from 75 cents/b Dec. 2. The spread for January averaged 86 cents/b in November.

The cash Brent/Dubai spread flipped to negative for the first time in nearly two months to minus 4 cents/b for February Dec. 19. The spread was last lower on Oct. 30, at minus 1 cent/b, Commodity Insights data showed.

At the same time, supply of Iran-origin crude to China remained relatively low for January-February, with the US Treasury Department Dec. 19 having issued a new wave of sanctions on the shadow fleet of tankers shipping Iranian oil.

One independent refiner was understood to be turning to Russian crude for prompt January delivery.

January-arrival Iranian Lightwas offered Dec. 19at a discount of around $1.30-$1.50/b against the ICE Brent Futures on a DES Shandong basis, narrowing from a discount of $1.80-$2.20/b a few weeks earlier, market sources said.

Iranian Heavy was last heard traded at a discount of around $4/b to ICE Brent futures, on DES Shandong basis. Offers for February were yet to be made.