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Lofty freight rates shield Asian sweet crudes from arbitrage competition

Singapore — Asian sweet crude differentials are expected to remain supported for the coming February trading cycle as multi-year high freight rates bar some competition from arbitrage barrels, Asian sweet crude traders said Thursday.

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The correction in middle distillate and residual margins since mid-November, however, could overshadow some of the recent strength seen. Regional crude differentials, particularly for grades with high yields of middle distillates and residuals, have traded at their highest levels this year for January-loading cargoes on a combination of lofty shipping costs and record-high refining margins.

For instance, a January-loading cargo of Vietnam's heavy, sweet Ruby crude, often seen as a barometer for heavy, sweet crudes in Asia, fetched a premium of around $3.75/b to Platts Dated Brent on a FOB basis, according to sources.

January-loading cargoes of Malaysia's light, sweet Kimanis crude meanwhile, the country's most liquid crude grade, were sold at premiums in the mid-to high $5s/b to Platts Dated Brent on a FOB basis.

These were the highest differentials fetched by both grades this year, S&P Global Platts data showed.

Traders said the recent strength was partly due to freight rates that have reached multi-year highs in the last month, particularly from West Africa, the Mediterranean and the US, where the bulk of low sulfur arbitrage cargoes come from.

VLCC freight rates on the West Africa to Far East route was assessed by Platts at a near 3-year high of $25.17/mt on December 3. It was last assessed higher on January 11, 2016 when it was at $26.14/b, Platts data showed.

Similarly, Suezmax freight rates on the US Gulf Coast to Singapore route was assessed by Platts at $36.92/b at end-November, a high not seen since December 4, 2015 when it was assessed at the same level.

"Freight is very expensive and a lot of cargoes that come here are arbitrage. So if freight is high then arbitrage cargo prices will be higher," one sweet crude trader said.

The expensive logistics have already deterred some traders trying to move cargoes into the region, sources said.

"Several guys were trying to move cargoes into Asia but they were not able to cover the freight costs," a second trader said. While the high freight costs are expected to keep regional grades supported in the near-term, traders said they expected falling margins for middle distillate and residual fuels to take some of the heat off recent traded differentials.

The M2 Singapore 380 CST fuel oil crack spread against Dubai crude had earlier touched a record high of $2.38/b on November 26. The spread has since fallen to minus 3 cents/b as of December 5.

Similarly, M2 gasoil refining margins that previously touched 4-year highs of close to $19/b in mid-November have eased by around $4/b over the same period.

"I see it coming off closer to [a premium of $5/b to Platts Dated Brent on an FOB basis] after initial buying," a third trader said, referring to Malaysia's Kimanis crude.

--Andrew Toh, andrew.toh@spglobal.com

--Edited by Liz Thang, elizabeth.thang@spglobal.com