Russian ESPO Blend premiums beat estimates in Jan on firm buying, supply squeeze

Premiums of Far East Russian ESPO Blend crude oil surged in January, beating traders' estimates, aided by robust buying interest and tight supplies, sources told S&P Global Platts Jan. 27.

March-loading barrels of ESPO Blend crude were heard to have been sold via several tenders at premiums of around $4.65/b-$5.10/b to Platts front-month Dubai crude assessments.

The premiums surpassed traders' expectations of a $4/b increase to the Dubai benchmark, Platts reported earlier.

In comparison, February-loading barrels of the crude traded at $2.80/b-$3.50/b last month.

"Actually, I'm a little surprised how strong it [spot premium] is," a trader with a Japanese trading house said.

Premiums advanced in January as trading houses continued to shop for the grade amid hopes of a pick up in demand later down the year.

This comes despite subdued demand from key buyers in China, as the close proximity to Far East Russia attracts trading houses to store the grade and deliver shipment on a short voyage of around 4-5 days, according to market sources.

"In fact, [ESPO] it is too strong but Chinese demand is not as good especially teapots. There will be the Olympic run cut and the lockdowns are hurting products margin," a trader in Singapore said.

Independent refineries Lijin Petrochemical, Kenli Petrochemical, as well as Yanchang Petroleum, were heard to have purchased only about five cargoes of the crude in total in the last few days, according to trade sources.

The fewer number of cargoes come as Chinese independent refineries are required to cap utilization rate at below 70% during Jan. 28- Feb. 20, and Feb. 27-March 13 to curb emission for the Winter Olympics, and some already shut for maintenance ahead of this period.

The weekly run rates at Shandong's independent refineries slowly dropped in the last four weeks to 62.5% from 66.4%, according to local energy information provider JLC on Jan. 26. The average run rates could fall below 60%, if all independent refineries adhere to the directive and cut their respective run rates below 70%.

"The higher premiums [are] largely [a] result of the tight supply for March cargoes, and the overall tight market structure," said a source with a Chinese independent refinery.

Tighter supplies of ESPO Blend for March-loading crude may have further stoked the rally in differentials as a result of terminal maintenance at the Kozmino load port, another trader in Singapore said.

"Basically March is tighter, so price is supported," another trader with a Japanese trading house said. "I heard all firsthand cargoes sold [but] a couple of second hand cargoes still being offered."

In January, demand from Japanese and South Korean buyers also further fueled the ESPO Blend premium, the first trader in Singapore said.

"We can see Japanese and Korean [refiners], bought some ESPO this month for March and at the tender levels. They purchased early and moved fast," the first trader said.

Some upside for Sakhalin Blend

Similarly, cash premiums for Far East Russia's light crude oil, Sakhalin Blend, also rose on the month despite sluggish naphtha product cracks.

Three 730,000-barrel cargoes of the light distillate-rich Sakhalin Blend crude, for April delivery, were heard sold to Chinese and South Korean end-users at a premium of high $4/b to Platts front-month Dubai assessments, CFR North Asia, traders said.

Last month, March delivery barrels of Sakhalin Blend traded at a premium of around mid-to-high-$4s/b against Platts front-month Dubai crude assessments, CFR, traders said.

The crude oil grade typically has an API gravity of 45.5 and sulfur content of 0.16%.

"Sokol and ESPO are also trading strong, supporting Sakhalin [sentiment]," said a crude oil trader.

In the March trading cycle, Sokol crude premiums were also seen to find firm footings on the month.

India's ONGC Videsh Ltd., or OVL, sold 700,000 barrels of Sokol for March 18-24 loading to trading house Vitol at a premium of around mid-$5s/b to Platts front month Dubai assessments, CFR Yeosu, traders said.

Previously, OVL sold similar volumes of Sokol crude to a South Korean end-user for Feb. 20-26 loading at a premium in the low-$4s/b to Platts front month Dubai assessments, CFR Yeosu, according to traders.

The Brent-Dubai Exchange of Futures for Swap, or EFS -- a key measure of the relative strength of Brent-linked crudes versus Dubai-linked crudes -- averaged $3.72/b in January to date, up 26.5% from $2.94/b over December, according to Platts data.

A wider EFS makes Dubai-linked regional crude grades more economically attractive in comparison to its Brent-linked alternatives.

Tepid naphtha cracks, however, could put a lid on further upside potential for Sakhalin Blend.

The second-month naphtha swap crack versus the Dubai crude swap averaged 69 cents/b in January so far, down from $2.95/b over December, Platts data showed.

"Demand from Northeast Asia is generally stable. However, worsening COVID-19 situation in Japan may have impact on demand," said a crude oil trader.