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Trader interest for ESPO Blend burns bright as Chinese demand continues to flicker

Highlights

Spot premiums expected to rise compared to December

Higher Dubai structure, limited arbitrage barrels may strengthen premiums

Spot differentials for Far East Russia's ESPO Blend crude are likely to trade higher this month compared to December 2021, supported largely by firm buying interest from trading houses despite lackluster demand from China's private refineries, sources told S&P Global Platts.

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"ESPO [spot premiums] should be high this month. I believe they will try their luck, the traders. They are [also] expecting April to be pretty much strong," a trader with a North Asian refinery said.

With trade for March-loading ESPO Blend crude expected to commence in the days ahead, market sources expect cargoes to exchange hands at higher premiums compared to the previous trading cycle.

"Fair value is mid $3-$4/b [premium to Platts Dubai]. Front-loading cargo may move at around $4/b [to Platts Dubai]," a trader with a Japanese trading house said. At the Asia close Jan. 13, Platts assessed March-loading ESPO Blend crude at a premium of $3.65/b to Platts front-month Dubai crude assessments.

In December, cargoes for February-loading ESPO Blend crude traded at premiums of around $2.80/b-$3.40/b to Platts front-month Dubai crude assessments, Platts data showed.

The robust sentiment for ESPO comes amid a strengthening of the Dubai crude complex this month compared to December, as well as a widening Brent/Dubai Exchange of Futures for Swap (EFS), sources said.

At the Asian close Jan 13, the Dubai cash/futures spread was assessed at a premium of $2.165/b, rallying from a low of 71 cents/b Dec. 31, 2021, Platts data showed.

The spread of COVID-19 across the globe and in parts of Asia has done little to deter demand for crude in the region, traders said. Limited availability of arbitrage grades from the West could further support demand for ESPO Blend crude this month, some sources said.

"Arbitrage [cargoes] like West African and Brazilian [grades], not much left for March-arrival window, so feel ESPO should be supportive," the second trader in Singapore said.

A wider Brent/Dubai EFS makes Dubai-linked crude, such as ESPO, more economically attractive compared to Brent-linked crude. The Brent/Dubai EFS averaged $3.56/b in January to-date, compared to $2.94/b for the whole of December, Platts data showed.

Private refinery demand

The expected uptick in ESPO's cash premiums for March-loading barrels mirrors a similar trend seen in the previous cycle, sources say.

In December, defying weak demand cues from key buyers of the grade -- Chinese independent refiners -- trading houses paid higher premiums for February-loading ESPO barrels.

"Last month, they [trading houses] did well. They picked position, there are some risks but [it was] worth the risk," the second trader in Singapore said.

This is despite weak import appetite among Chinese private refiners who are grappling with government scrutiny, capped import quotas and emission curbs stalling refinery runs, another trader in Singapore said.

In December, China issued the first batch of crude import quotas for 2022 to 36 qualified independent and non-major state-owned refineries, falling 9.4% from the same batch in 2021, Platts reported earlier.

Chinese private refiners are also expected to lower refinery runs amid emission curbs ahead of the Winter Olympics in February, industry sources said. Demand could also be dampened by upcoming maintenance plans, another independent refinery source said.

ChemChina's Huaxing Petrochemical and Changyi Petrochemical, two major buyers of ESPO, might shut for maintenance around March, according to a market source, with starting days not finalized yet.

Along with Zhenghe Petrochemical, ChemChina's three refineries in total have imported 7.3 million mt of ESPO in 2021, around 31% of the total imports by the sector over the year.

Despite the lower runs, trading house demand for ESPO Blend crude is unlikely to waiver given the proximity to Far East Russia enabling shorter delivery time, the first trader in Singapore said.

"They [Chinese private refiners] need to cut runs but they may store [ESPO crude] for later," the second trader in Singapore said. "[Shipments for] ESPO is [a] short voyage, only [around] four days."