London — With barrels of crude oil that will arrive in China in May now changing hands, hopes that demand from its refiners for African and European crude would tick higher following spring maintenance may have been premature.
After a bumper 2020 for sales to China, 2021 has got off to a slow start with demand for long-haul crude hit by higher flat prices, refinery maintenance season and fresh restrictions on mobility on the back of an uptick in coronavirus levels which coincided with Lunar New Year celebrations.
About 50 million mt/year of refining capacity at six state-owned refineries -- five Sinopec and one CNOOC -- was expected to be shut over the March-April period, while May could also witness some maintenance, albeit at a relatively lower level, industry data and information collected by S&P Global Platts showed.
Sellers of Atlantic Basin crudes hoped that once the bulk of refinery works were finished in May, crude arriving in that period would see more demand, but a confluence of factors has dashed expectations.
"Many companies positioned themselves to deliver May cargoes into China, betting on a demand recovery after the holidays ... that is not happening," one trader said.
Brent strength deters buyers
As Brent futures and benchmarks surge, others have struggled to keep pace, pushing Brent to its highest premium to Dubai futures in over a year, in tune complicating arbitrage economics for Atlantic Basin crudes.
The front-month Brent/Dubai exchange of futures for swaps has traded above $2.50/b through the past week, with the May contract last trading at $2.61/b.
The EFS, a key indicator of the relative strength of Brent-linked crudes against Dubai-linked grades, was last wider in January 2020 and traded in negative territory through much of last year.
Brent-linked Angolan crude, beloved by Chinese refiners, has seen slow trading of March- and April-loading barrels as a result.
"With the current [Brent/Dubai] EFS, it is difficult to see Angolan barrels heading east," a trader said. "Though, I do not think they have a home in the Med ... so I think sellers will load barrels and send them east waiting for economics to improve."
The situation was similar for another Brent-linked crude, Russia's Urals, which has seen demand from the east fade on the back of strength in Brent, according to traders.
Despite low freight rates, North Sea barrels have also been struggling to find buying interest from Asia, with VLCC fixtures failing and some vessels having withdrawn on the route heading East.
Dubai-priced alternatives such as Russian ESPO or Persian Gulf grades looked increasingly attractive to Chinese refiners, other traders said.
Alongside strength in Brent flat prices, the market has shifted into a steep backwardation –- a structure in which the forward price of oil is below the prompt price.
With a relatively long distance for Atlantic Basin arbitrage flows into China, the structure penalizes crude loading earlier, with shorter-haul barrels such as ESPO or Persian Gulf grades losing less money while on the water, traders said.
Stocks, margins limit sales
As well as discouraging long-haul flows, backwardation motivates refiners to draw from storage, and with healthy crude inventories in China, it does not make sense to buy fresh oil, according to traders.
Commodity data company Kpler estimates that inventory levels in China are around 936 million barrels, or 67% of the total capacity, a touch under a peak of 70% in September.
Additionally, product markets were well-supplied in China, sources said, with inventories rising.
"Refinery margins in China are not that good ... gasoil demand is not good and [China] is now exporting more diesel as a result," a trader said.