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APPEC: Narrow light-heavy crude spread puts pressure on Asian refiners to diversify feedstock


Light-heavy crude price spread may trade closer to parity

Complex refineries need to expand feedstock choices

Asia heavy crude price differentials rally to record highs

  • Author
  • Andrew Toh    Eesha Muneeb    Gawoon Philip Vahn    Mriganka Jaipuriyar
  • Editor
  • Geetha Narayanasamy
  • Commodity
  • Oil
  • Topic
  • Oil Price War IMO 2020 US-Iran tensions

Singapore — Ample global supply of light sweet crude oil doesn't necessarily bode well for many Asian refiners, as companies with complex secondary units that rely more on heavy crude grades need to cope with volatile feedstock costs, industry executives and refinery sources said Monday.

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Asian refineries have witnessed the price of their baseload feedstock heavy-end crude grades rise substantially relative to lighter oil in recent quarters, strengthening the impetus for the companies to better manage their input and output margins, the executives said during a panel discussion at the S&P Global Platts Asia Pacific Petroleum Conference in Singapore.

Considering the rapidly improving US crude export infrastructure and tightening heavier crude supply amid OPEC output cuts, as well as sanctions on Iran and Venezuela, the light and heavy crude differentials should soon be "trading close to parity," said Harry Tchilinguirian, head of commodity research and senior oil economist at BNP Paribas.

Reflecting the ample light-end crude supply and tightening availability of heavy-end oil, the spread between Saudi Aramco's official selling price for its Arab Extra Light crude and Arab Heavy crude bound for Asia tumbled to $1.05/b for cargoes loading in September. This marked the lowest spread level between the light and heavy Saudi crude OSPs since 80 cents/b in August 2003.

In addition, the Brent/Dubai Exchange of Futures for Swaps -- a key price indicator that often serves as a barometer of general strength in the lighter and sweeter crude complex over heavier Persian Gulf grades averaged $2.05/b to date this year, lower than $2.93 in 2018, S&P Global Platts data showed.

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For many highly sophisticated and complex refineries in India, South Korea, China and Japan that are capable of processing heavy crude oil into value-added oil products, the relative strength in the heavy-end crude complex would continue to put downside pressure on refining margins.

"Heavy crude processors are typically complex refineries that had invested lots of time and money [to upgrade their secondary units]," said Puneet Kumar, vice president of crude oil and feedstocks trading at India's Reliance.

Puneet added that the complex refineries may need to become more selective in their feedstock choices and negotiate further on prices with the feedstock suppliers.

"In the end, there's no such thing as an 'optimal crude slate' ... refiners simply need to look for the best and most economical grades that give the best margins," he said.

In Northeast Asia, numerous refinery turnarounds took place earlier this year, with multiple refineries in South Korea, Taiwan and Japan tweaking their Linear Programing models and refinery configurations to maximize the growing use of lighter and sweeter crude from the US, industry and company sources said on the sidelines of the APPEC conference in Singapore.

"Investment, upgrades and changes [in crude and product slates] never stop," a feedstock trading manager at a South Korean refiner said.

"Just because the system has been comfortably running on medium and heavy crudes, it doesn't mean that it can forever run on such grades, especially when margins don't work," he added.

"[As heavy crude prices strengthen], Asian refiners should look for a broader range of suppliers and markets to source their feedstocks," Stefano Grasso, general manager at Eni Trading & Shipping, said.


In the Asia-Pacific sweet crude market, various heavy sweet crude grades saw their price differentials surge to record highs in recent trading cycles.

Australia's Vincent crude for one, was assessed at a premium of $13.40/b to Platts Dated Brent on August 26, the grade's highest price differential since Platts the assessment of the heavy sweet crude in February 2009.

Australian heavy sweet grades including Vincent, Van Gogh and Pyrenees are widely seen as an ideal feedstock for low sulfur marine fuels.

Lofty spot premiums paid for the heavy sweet grades so far this year reflect the surge in stockpiling demand for LSFO components in preparation for January 2020, when the International Maritime Organization's new sulfur cap for marine fuels kick-in, the sources added.

In a similar vein, Indonesia's heavy sweet Duri was assessed at a premium of $6.60/b last Friday, the grade's highest differential since $6.86/b on July 2, 2012, Platts data showed.

In the Middle East, Iraq's Basrah Heavy crude monthly official selling price differential averaged minus $1.76/b to the mean of Platts Oman/Dubai assessments so far this year, higher than minus $3.49/b average last year and minus $4.87/b in 2017.

-- Andrew Toh,

-- Eesha Muneeb,

-- Gawoon Philip Vahn,

-- Mriganka Jaipuriyar,

-- Edited by Geetha Narayanasamy,