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Analysis: European arbitrage barrels may curb Asian sour crude rally

Highlights

European demand for Urals weakens with HSFO cracks

Asian sour crudes see competition from Urals arbs

Middle East crudes see robust demand from Asian buyers

Singapore — Flows of Russian Urals crude are being diverted from Europe to Asia and could keep a lid on sour crude premiums in the East through September, crude oil traders in Singapore told S&P Global Platts this week.

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"Lots of Urals coming here (Asia) since fuel oil cracks are so weak," said one crude trader on Tuesday.

The 3.5% FOB Rotterdam barge crack in Europe hit eight-year lows earlier this month, according to Platts calculations, as refineries start cutting back on production of high sulfur fuel oil there.

Sour crude grades like Urals produce residues with higher sulfur content, making them less economical for refiners than sweeter crudes such as North Sea Brent.

November cash Dubai's premium over futures fizzled down to $1.72/b as of 3 pm in Singapore (0700 GMT) Wednesday, down from a month-to-date high of $2.05/b assessed on Monday, according to Platts data.

Even so, demand for medium and heavy high sulfur crude does not seem to be dissipating East of Suez, where refiners from China to India continue to see healthy appetite for seemingly less desirable grades.

Although fuel oil margins globally have begun their descent ahead of January 2020, spreads in Asia have diverged from the crude oil sentiment.

The FOB Singapore 380 CST fuel oil swap crack spread to Dubai averaged minus $10.24/b over August, down sharply from minus $3.55/b over July, according to Platts data.

But cash Dubai M1/M3 spreads, a proxy of sentiment for medium sour crude in Asia, averaged $1.75/b over August, firming from $1.30/b in July despite nearing a global low sulfur deadline on maritime shipping fuels that is expected to see fuel oil margins fall into deep negatives.

Middle East producers earlier this month also hiked prices across the board to Asia, implying firm demand from their long term contractual customers in the region.

Iraq -- one of the largest suppliers of medium and heavy high sulfur crude globally -- is seeing more demand for its crude than it can supply, its oil minister said Tuesday ahead of a key OPEC+ ministerial meeting in Abu Dhabi.

"Until now we have seen more demand than we can offer," Iraq oil minister Thamir Ghadhban told journalists on the sidelines of a conference in Abu Dhabi. "We have been contacted by oil companies and traders who we do not even deal with because of the nature of our oil and the technology of refineries that prefer our oil to the very light shale oil."

Almost 70% of Iraqi crude goes to Asia, with China and India being its two largest customers. Europe is also a key buyer of Basrah Light. Iraqi crudes are also blended with lighter and sweeter oils to ensure a diverse array of oil products.

Urals, with API of around 31 and sulfur content of 1.25%, is similar in quality and yield to several Middle East medium sour crude grades. Oman, for example, has an API of around 30.5 and sulfur content of 1.38%, according to data compiled in the Platts Periodic Table of Oil.

--Eesha Muneeb, eesha.muneeb@spglobal.com

--Edited by Shashwat Pradhan, shashwat.pradhan@spglobal.com

Platts Periodic Table of Oil

Know the difference between Oseberg and Cabinda. Our interactive table is your comprehensive guide to 120 of the most important crude grades traded on global markets.

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