Asian refined oil products strengthen after US, UK announce fresh sanctions on Russia

Refined product markets strengthened in midmorning Asian trade on Jan. 13 after the US and UK announced fresh sanctions on Russia's energy sector on Jan. 10, causing the front-month swaps backwardation to widen sharply.

The major sanctions package tightens curbs against Gazprom Neft and Surgutneftegas and adds more than 180 ships, dozens of oil traders, oilfield service providers, tanker owners and managers, insurance companies, and energy officials to a blacklist, the US Treasury said in a statement.

According to S&P Global Commodity Insights analysts, around 95% of these newly sanctioned ships loaded crude oil and refined products originating from Russia, while some of the remaining sanctioned ships loaded oil from Iraq and Iran.

"There have also been reports that some Chinese ports are being urged to forbid sanctioned oil tankers from docking or unloading at their terminals." ANZ research analysts, Brian Martin and Daniel Hynes said in a Jan. 13 note.

Middle distillates

Asian gasoil derivatives jumped to a near eleven-month high following the recent imposition of sanctions.

"Yes [gasoil gains are] driven by this headline, I think it will increase the volume of cargoes in floating storage," said a Singapore-based gasoil trader.

The front-month February-March gasoil swap times spread was pegged at plus $1.10/mt at 0300 GMT Jan. 13, which more than doubled (107.55%) from plus 53 cents/mt at the previous Asian close on Jan. 10 -- reaching a near eleven-month high. The M1/M2 gasoil time spread was last higher on Feb. 19, 2024, when the Asian close was $1.11/mt.

Sending barrels from East to West is also more economically viable, seeing that Asian gasoil prices fell further than gasoil prices in the West.

Brokers pegged the front-month February gasoil EFS -- an indicator of East-West arbitrage flows -- at minus $33.50/mt at 0300 GMT on Jan. 13, widening severely by $11.73/mt from the Platts-assessed minus $21.77/mt at the previous Asian close Jan. 10.

Market participants closely watch the gasoil EFS spread as an indicator of East-West arbitrage economics, and a more negative spread suggests that the arbitrage is becoming more economically lucrative.

Market participants expect premiums for physical cargoes to be supported, with gasoil supply expected to decrease as a result of the sanctions.

"There will be less supply ... both China and India rely on cheap Russian crude," an Asia-based trader said.

"Gasoil is up from expectations of lesser quota exports from China as well," added another Asia-based middle distillate trader.

A slightly larger jump was marked in the jet fuel segment, as the front-month February-March jet fuel/kerosene swap time spread was pegged at plus 80 cents/mt at 0300 GMT Jan. 13, which spiked 122.22% to plus 80 cents/mt from the previous Asian close Jan. 10. The M1/M2 jet fuel/kerosene time spread was last at parity in 2024 Nov. 11 Asian close at 80 cents/mt.

According to a trade source, some market participants believe that China's run rate may drop as many of its teapot refineries rely on sanctioned crude. The bullishness in the Asian jet fuel/kerosene complex is expected to be short-lived, as regional supply should remain long despite the sanctions.

Light ends

Sources said Asian gasoline prices were expected to increase, tracking gains in crude, despite the newly announced US sanctions on Russia.

The Asian gasoline 92 RON front-month February swap against the month-two March time spread traded at 30 cents/b at 11:24 am Singapore time, wider by 76.47% day over day from the Jan. 9 Asian close at 17 cents/b, Commodity Insights data showed.

"I think gasoline prices are simply rising in tandem with crude, but I don't think there is much impact on overall gasoline supply in the region as normally very little gasoline from Russia finds its way to Asia anyway," a trader said.

"So far, it seems that the impact is more on gasoil, and there could be some impact on naphtha prices," a Singapore-based trader said.

Meanwhile for naphtha, brokers pegged the front-month January-February swap time spread at $6/mt on Jan. 13, up $1.25/mt from the previous Asian close.

"It seems that all refined products became firmer," a trader said.

LPG traders in Asia do not expect these sanctions to have any immediate impact on the market but do not rule out the possibility of changes to trade flows going forward.

Brokers pegged front-month February-March CFR North Asia propane swaps at $15.50/mt, widening from Platts assessment of $14.50/mt at the Asia close on Jan. 10.