Singapore — Dwindling demand for Russian ESPO crude, purchased mostly by Chinese independent refineries, has done little to hurt the grade's spot differentials which continue to register robust premiums in early-month trades.
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Buying appetite from China remains dull amid reports of bloated inventories and an increasing glut of Iranian crude.
Trade sources said May and June crude buying volumes may remain subdued, clouding the buying outlook even more at a time when a government investigation on the China's private refining sector has already rung alarm bells among global oil suppliers that independent refiners would be moving cautiously in sealing deals in the near future.
Despite the bleak outlook from a key market for ESPO blend crude, the strong spot differentials witnessed for early-month tender purchases has left market participants perplexed.
"Chinese are showing low numbers. Trading houses are holding cargoes [and will be] trying to sell when the market will be higher," said a trader with a North Asian oil major.
Trade for ESPO Blend kicks off every month with Surgutneftegaz's sell tenders, which typically see healthy spot differentials, following which cargoes sold by other sellers tend to receive less impressive spot differentials, traders said.
"Surgutneftegaz sells earlier than others," said the trader, explaining the phenomenon. "[They] guarantee dates first."
For June-loading cargoes, Surgutneftegaz offered eight cargoes which were sold at premiums of $2.20/b-$2.50/b to traders and oil majors such as Gunvor, Shell, Vitol and Mercuria.
"That's a high price. But it is always the case with Surgutneftegaz. They start on $2/b+ and others finish below $1/b," said the trader.
Apart from China, South Korea and Japan have developed as potential markets for ESPO crude although limited purchase volumes from the two countries are unlikely to define spot trading every month.
Brent-Dubai spread supports premiums
Amid the weak Asian demand, a widening Brent-Dubai spread -- key indicator of the spread between light, sweet and heavy, sour crudes -- continues to hover around the $3/b mark, enticing buyers to consider Dubai-linked crude grades.
Month-to-date, the Brent-Dubai spread has averaged $3.03/b, the highest since November 2019, when it averaged $3.34/b for the whole month.
"Brent-Dubai is wide. If they [sellers] are targeting the teapot market, the ice related level is just okay," said a trader with a North Asian refinery.
An added benefit of the widening spread is the access to arbitrage markets such as the US where ESPO crude was sold in March as Asian demand was soft.
Purchase of ESPO crude cargoes by traders could indicate a strong arbitrage market offering better economics than regional markets, traders said.
"No East buyers [are] likely to buy at such levels but US buyers [are] supporting it [ESPO trades]," said a crude oil trader.
Another trader, however, suggested that holding on to cargoes could be detrimental as it would not help the seller amid ambiguous demand scenarios across the globe.
"I don't think it's a good time to hold cargoes. They should do whatever they can to sell instantly," said the trader with a North Asian refinery.
Meanwhile, keen discussions among traders continue about the expected spot differentials for ESPO crude as trade for June-loading barrels nears its culmination.
"Today [ESPO is trading] below $2/b already. Expect it to trade around $1.75/b by month-end," said the first trader.