Russian ESPO crude premiums plunge in absence of Chinese demand

Spot differentials for January-loading Russian ESPO Blend crude took a sharp dip, as demand from China's private refiners turns bearish on the back of lower refinery runs to curb emissions ahead of the Winter Olympics and increasing government scrutiny, sources told S&P Global Platts on Nov. 18.

"Generally Chinese demand not there. They are quite conservative now," a trader with a Japanese trading house said.

In its third spot tender for January-loading ESPO crude, Russia's Surgutneftegaz sold three 700,000 barrel cargoes at premiums of around $4/b-$4.30/b to Platts front-month Dubai crude assessments, data showed.

The premiums reflect a sharp drop compared to the first two tenders issued by the Russian oil major where cargoes were heard sold at premiums of around $5.90/b-$6.40/b to Platts front-month Dubai crude assessments, the data showed.

"Seems Chinese independent refiners got weak demand indications," a trader with a North Asian refinery said.

Similar to previous months, most ESPO Blend cargoes were heard bought by trading houses but with Chinese independent refinery demand turning sluggish, the premiums have slipped as well, traders said.

"Last night [for Surgut's third tender], teapot demand totally disappeared. No one came," a trader in Singapore said.

Government crackdowns, weak margins and expected emission curbs ahead of the Winter Olympics in February 2022 have dampened Chinese buying interest even further this month, the trader in Singapore said.

"This week, three teapots which used to buy 5-6 ESPO [cargoes] every month are facing tax problems [so] this probably is a factor," another trader in Singapore said.

Meanwhile, the expected reduction in refinery runs ahead of the Olympics to curb emissions further capped appetite, sources said.

"The runs will be limited because of environment control because of Olympics. January demand should be the low point of the whole year," the first trader in Singapore said.

In addition to emissions control, "Chinese government's zero-tolerance controls on COVID-19 re-emergence will continue to cap the country's demand for gasoline and jet fuel until the end of Winter Olympics." a Beijing-based analyst with a state-owned oil giant said.

Weaker sour complex impacts spot premiums

Diminishing spot differentials also reflect a softening sour crude complex that continues to edge lower, traders said.

At the Asia close on Nov. 18, the January cash Dubai versus same-month Dubai futures was assessed at a premium of $3.17/b, dropping 24 cents/b from the previous day's close, Platts data showed.

Demand for light, sour crudes such as Murban and ESPO Blend has fallen with refiners eyeing similar arbitrage grades from the West, sources said.

The January Exchange of Futures for Swaps, or EFS, was assessed at a premium of $4.25/b at the Singapore opening Nov. 18, down from a high of $5.41/b at the Nov. 2 close, the data showed.

"Actually some Midland was traded [into Asia] in this situation that EFS getting weaker," another trader with a North Asian refinery said.

The EFS is often tracked as an indicator of the value of North Sea low sulfur crude versus Middle East high sulfur crude, and a wider EFS makes crude priced against Dubai more economically attractive compared with Brent-linked ones.

Supply concerns in the West along with a resurgence of COVID-19 infections has dampened sentiment for benchmark grades such as WTI which in turn could impact regional crudes such as Murban and ESPO Blend, sources said.

"Murban linked with other regions light ,sweet grades like WTI [and] WTI is getting weaker," the first trader in Singapore said.

At the Asia close on Nov. 17, January IFAD Murban differential to January Dubai futures was assessed at a premium of 4.59/b compared to a premium of $5.48/b the previous day, Platts data showed.