Middle East sour crude is confounding forecasts to outperform even the most optimistic prediction as it holds its own in the face of an anticipated surge in demand for sweet barrels ahead of the need to use lower sulfur marine fuels from next January.
Going into the International Maritime Organization’s 2020 (IMO 2020) mandate to use 0.5% sulfur fuels, the majority of industry expectations was for a jump in sweet crude demand accompanied by a corresponding increase in its value as refiners seek these lower sulfur barrels to produce the new bunker grades.
However, U.S. sanctions against Iran and Venezuela, OPEC output cuts and U.S. ban against six Chinese shippers have led to a shortage of sour barrels to the blend trading at differentials not seen for years in some cases in the past couple of months.
The strength of sour crude was also helped by strong demand from Chinese refiners, especially the independents, who soaked up much of the available spot medium-sour Oman barrels giving the grade a huge boost.
“People were initially forecasting a wide Brent-Dubai spread, and have since then been gradually lowering it,” said one crude analyst, adding that few people are betting on the spread widening significantly in the coming months.
Indications of the higher relative value of sour barrels East of Suez include DME Oman futures consistently trading above ICE Brent for long periods, this time stretching back to end September. The spread has ballooned to almost $1/bbl, which is the most in at least a year, market sources said.
The front-month Brent-Dubai EFS, an indicator for the flow of Atlantic barrels to Asia, has also regularly traded below the pre-sanctions $3/bbl marker compared with some forecasts for as much as $5/bbl, they said.
The spread widened on Thursday to $2.71/bbl from $2.58/bbl on Wednesday, broker data show.
“The weak global economic outlook is having a greater impact on Brent, but the IMO regulations will lead to bigger demand for low sulfur marine fuels that will benefit sweet crude over its sour counterpart,” said Premasish Das, IHS Markit's Downstream Research & Analysis director in Singapore.
The continued demand for sour crude among Chinese refiners and strong high sulfur fuel oil cracks were among the reasons for IHS Markit to trim their Brent-Dubai spread forecast, Das said.
IHS Markit had cut its 2020 forecast for the outright price difference between Brent and Dubai crude, Das said but declined to provide exact numbers as the revisions have yet to be published.
Oman Crude Exports to China
China is the most prolific buyer of Oman crude, taking in 333.4 million barrels, or 75%, of the 447.5 million barrels shipped over the past two years, according to data from IHS Markit’s Commodities At Sea.
Traders said the ready availability of Oman crude in the spot market and the excellent distillate yield from its fuel oil when used as cracker feeds have placed a premium on this grade. It has also had the knock on effect of boosting other Middle East sour blends.
The world has lost 3 million barrels a day (b/d) of heavy crude since late last year while robust U.S. shale production growth has led to the global crude slate getting lighter by API 0.4 in the past two years, according to one source.
The increase in sweet crude availability and jump to shipping costs has pushed oil companies to relook their refining economics and crude intake.
“Traders are fed up with paying such high premiums for their sweet barrels, especially after shipping cost almost tripled from the Cosco sanctions,” said one trader. “There was a revaluation of the West African barrels to see if they were really worth the big premiums.”
Asian Sweet Crude Purchases from USGC/South America
Asian refiners, on the back of rising exports from the Americas, have a variety of sweet crudes to choose from and are increasingly willing to experiment with blends that are new to them, including trialing new shale, Caspian and North Sea grades.
This had the impact of cutting differentials for West African sweet crude by $1-2/bbl across the various grades this month, market sources said.
Traders holding November loading cargoes struggled to find outlets for their barrels for the first time in months and were consequently forced to slash asking prices, they said.
Conversely, Russian Urals, which fell out of favor after the contamination scare earlier this year and European refiners’ decision to process more sweet crude to cover their IMO needs, suddenly looked cheap and allowed Chinese buyers to pick up several cargoes including at least two very large crude carrier (VLCC) loads, traders said.
Current sweet-sour spreads have prompted Chinese refiners to run their residue desulfurizers at full tilt to take advantage of cheaper high and medium sulfur crudes including the newest North Sea blend, Johan Sverdrup.
The recent drop of freight rates quickly rekindled the North Sea-Asia Forties crude flow as players jumped back in to book several tankers for this lucrative arbitrage route that is a favorite among Chinese and Korean refiners.
Traders said this shows that Asian refiners’ appetite for sour crude remains strong and expect prices to stay firm going into 2020.
-- Raj Rajendran, Rajendran.Ramasamy@ihsmarkit.com
Copyright, Oil Price Information Service
