China's Sinopec Shanghai to embrace Middle Eastern sour crude to cut costs

Singapore — Sinopec Shanghai Petrochemical said it will take advantage of cheap medium sour Middle Eastern crude for the rest of the year as it expects Saudi Aramco to maintain the official selling price for Arab Light and Arab Medium crudes below a $1/b premium to the Platts Dubai/Oman average in the fourth quarter.

In the first half of 2020, competitive Saudi crude grades helped the company save costs significantly, CFO Zhou Meiyun said during the company's earnings call on Aug. 27.

OSP differentials for the medium and heavy sour Saudi grades averaged around 56 cents/b in the first half, while other Middle Eastern grades, such as Kuwait Export Blend, Basrah and Oman, followed Aramco's price cuts, Zhou said.

As a result, Shanghai Petrochemical's crude processing cost dropped 17.9% year on year to Yuan 2,716.99/mt ($394.92/mt) in H1, the company's interim earnings report showed.

Middle Eastern crudes accounted 84.64% of Shanghai Petrochemical's overall crude feedstocks in H1, higher than 80.37% a year ago, the report showed.

Earlier this month, Aramco dropped its OSP differential for Arab Light cargoes to load in September by 30 cents/b from August to a premium of 90 cents/b to the Dubai/Oman average.

Refinery officials and crude trading managers in Asia told S&P Global Platts there is a good chance for another OSP cut for Saudi crude due to load in October, as the recovery in the Platts Dubai market structure had stalled in recent trading cycles amid fragile Asian fuel demand and tepid refining margins.

The spread between front-month Cash Dubai and same-month Dubai swaps has averaged minus 65 cents/b to date in August, compared with the average of 71 cents/b in July, Platts data showed.

The Dubai crude market structure is understood to be a key component in Saudi OSP calculations.

Meanwhile, European low sulfur crudes, including the sweet barrels from North Sea, accounted 2.71% of its overall crude slate from zero in H1 2019.

"We will also keep an eye on the OSP changes and the price movements for the sweet crudes which are priced against DTD (Dated-Brent), to optimize crude procurement costs in H2," Zhou said.

The 320,000 b/d Shanghai Petrochemical is oil giant Sinopec's sole listed refinery, and its moves are typically representative of China's state-owned refineries.

Oil product slate

Shanghai Petrochemical plans to process 7.68 million mt (308,000 b/d) of crude in the second half to cater to domestic fuel demand recovery, but total crude throughput is likely to fall behind its 15.3 million mt target set for 2020, Zhou said.

Its crude throughput declined 6.08% year on year to 7.02 million mt in H1 primarily due to a 350,000 mt throughput reduction in February at the peak of the coronavirus outbreak.

Meanwhile, Sinopec Shanghai will continue to optimize its oil product slate in line with consumer and industrial fuel demand changes, it said.

The company plans to continue cutting jet fuel/kerosene output as demand from the aviation sector remains weak, with only 20% of international flights and 80% domestic flights resuming, Zhou said.

Gasoil demand was weakening with abundant domestic supplies, while low sulfur fuel oil consumption is expected to recover as freight traffic is expected to pick up, in line with improving economic activity, a senior official said during the call.

Therefore, the company would cut gasoil output to boost LSFO production, the official added.

In H1, Shanghai Petrochemical slashed its jet fuel output by 31.08% year on year to 637,600 mt, while its gasoil output edged up 0.82% to 1.8 million mt.

Shanghai Petrochemical's crude supply sources:

Shanghai Petrochemical's oil product output ('000 mt)