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Forties arbitrage to Far East picks up on Chinese demand, cheap freight

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Forties arbitrage to Far East picks up on Chinese demand, cheap freight

London — The arbitrage east of key North Sea crude Forties has picked up recently as a result of cheap freight and China importing less US crude, traders said.

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Urals being more competitive of late was also a factor in that it resulted in weaker local demand for Forties, putting a cap on the grade's value, the sources said.

The impact of Urals on the arbitrage east, however, paled beside Chinese demand for a replacement barrel for WTI Midland, a trader said, as China has not been importing as much US crude recently.

The VLCC Dalma left Hound Point, UK, on Sunday for South Korea, data from Platts cFlow, trade flow software, showed, with at least four more VLCCs -- the Cosflying Lake, Farhah, Hakata and Noble -- expected to load Forties across the second half of June and early July for a discharge in the Far East, according to shipping sources.

Also, the VLCC Niban was anchored at the Hound Point terminal Tuesday, according to Platts cFlow, though its destination was unclear.

Traders had reported VLCCs being put on subjects for July loading as far back as the last decade of May, before North Sea loading programs were available. One North Sea trader said Wednesday there were 5-6 VLCCs booked for June loading and 1-2 for July.


Also contributing to the increasing arbitrage flows has been build-up of tankers in the region over the past couple of months.

Freight rates for Hound Point to South Korea, on a 270,000 mt basis, were assessed at a lump sum $4 million on Tuesday. That was down from an all-time high of $7.4 million on December 20, according to S&P Global Platts data.

"The low freight must have prompted a couple of buyers," said a shipbroker specializing in the VLCC segment.


"Urals makes a lot better sense locally. [So,] the North Sea grades have to go somewhere," a second trader said, indicating that sellers of Forties likely needed to look for buying interest outside Europe.

Over the second half of 2018, China rose to become the largest regular importer of Forties. In April, 100% of the Forties loading program went to China, according to Platts cFlow, while Europe was the leading importer of the grade in May as market participants looked for alternative to Urals due to contamination concerns.

Over the past few weeks, Urals differentials to Dated Brent have fallen to some of their lowest levels in the past six months.

May's schedule saw Urals cargoes sell at widely diverging prices, dependent on whether a cargo came from Ust-Luga -- which was affected by the contamination -- or the untainted Primorsk.

For June cargoes, a lower premium of 10-30 cents/b has emerged for Primorsk cargoes over Ust-Luga, as the levels of contamination has dropped and Ust-Luga quality has returned to within normal specifications.

The Urals market in June has also been hit by backwardation in the Dated Brent market, alongside one of the largest loading programs in almost two years, leading sellers to cut differentials to attract buyers.

With dropping prices however, refinery margins on Urals have picked up, attracting back some buyers scared away during the contamination issue.

"At these levels, Urals is close to the best barrels around and certainly compared to sweet [crude] margins, refining margins on Urals are OK," a trader said.

-- Emma Kettley,

-- Maude Desmarescaux,

-- Gillian Carr,

-- Arthur Richier,

-- Edited by Dan Lalor,