Widening Brent-Dubai spread may curb Asia's H2 European, African crude imports

Asian crude importers are finding it increasingly expensive to shop for spot cargoes from the European and African markets as the benchmark Brent-Dubai price spread extends the upward momentum, with Northeast Asian refiners revising their feedstock procurement plans from the North Sea, while Southeast Asian buyers favor Middle Eastern grades.

While North Sea, Mediterranean and African crude grades are not staple diet for Asian refiners, many end-users in the Far East still require a regular dose of light- and medium-gravity crude oil from the West of Suez for feedstock blending and optimization purposes.

However, with the spread between the European benchmark Brent and the Asia-Middle Eastern marker Dubai hovering near three-year highs amid demand recovery in the West outpacing that in the East, refiners across Northeast Asia, Southeast Asia and South Asia are scrambling to readjust their feedstock procurement strategy for deliveries in the second half of the year.

The Brent/Dubai Exchange of Futures for Swaps, or EFS, spread -- a key indicator of Brent's premium to the Middle Eastern benchmark – has averaged $3.17/b to date in the second quarter, on course to set the highest quarterly average since $3.81/b in Q2 2018, S&P Global Platts data showed.

A stronger EFS makes various crude grades produced in the North Sea, Africa and the Mediterranean that are linked to the European benchmark less economical than Dubai-linked grades.

Chinese, S Korean refiners

Chinese independent refiners have been actively picking up Norway's Johan Sverdrup crude over the past year, but with spot premiums rising rapidly and their crude import quotas fast running out, the country's private refining sector is poised to trim shipments from the European producer.

Hebei Xinhai Petrochemical recently paid for a Johan Sverdrup crude cargo for August delivery at a premium of around $1.6/b to front-month ICE Brent futures on a DES basis, which many traders based in China said was expensive.

Independent refiners will likely favor their staple Russian ESPO Blend crude and heavy sour Middle Eastern and Brazilian grades in the second half as the spot premium for the Norwegian crude has gone up a notch to around $2/b in recent trading sessions, according to multiple trading and feedstock managers in China's Shandong independent refining complex.

In South Korea, SK Innovation has been the country's main buyer of North Sea Forties crude over the past year, taking full advantage of benchmark Brent's steep discount against Dubai in 2020.

South Korea has regularly imported the light sweet crude from the UK since May 2020 when the EFS was pegged at around minus $5/b. The country has received close to 20 million barrels from the UK since late Q2 2020, compared with just 3 million barrels bought in 2019, latest data from state-run Korea National Oil Corp. showed.

However, the world's fifth biggest crude importer could put the brakes on its North Sea crude purchases in H2 as refiners no longer find Brent-linked Forties crude attractive after the EFS flipped to a lofty premium in recent trading cycles, a senior Seoul-based market analyst at Korea Petroleum Association said.

Instead, South Korea plans to revive purchases of US crude as North American cargoes are often traded on a Dubai pricing basis in the Northeast Asian market.

Some South Korean refiners were recently eyeing US Mars Blend crude with cargoes landing in September heard offered at around Dubai plus $3/b, which is still considered reasonable, said a trading desk manager with close knowledge of the Northeast Asian market bids and offers.

West African, Mediterranean crude

Meanwhile, Southeast Asian refiners including Vietnam's Binh Son Refining and Petrochemical, Thailand's PTT and Indonesia's Pertamina are poised to cut the share of their crude imports from West Africa and the Mediterranean market, while increasing Middle Eastern and US crude intake.

Baseload Middle Eastern supplies are looking a lot cheaper, as the wide EFS is making arbitrage flows uneconomical for many Southeast Asian refiners that often purchase West African grades like Que Iboe, Cabinda, Girassol as well as Mediterranean Azeri Light and Saharan Blend, a feedstock trading manager at a Southeast Asian refiner told Platts.

Some regional refiners are even considering picking up light-end US grades including WTI Midland as light sweet grades from the Mediterranean and West Africa become less attractive due to the high EFS, while Abu Dhabi's light sour Murban's price differentials are also on the rise amid tight supply, the Southeast Asian trading source said.

Rising bunker costs amid the uptick in outright oil prices will also likely dampen regional refiners' overall appetite for long-haul crude oil supply, and Persian Gulf cargoes would prove advantageous, cutting down shipping distances and freight costs compared to other regions, trading sources and refinery officials told Platts.