Cash differentials for Asia Pacific sweet crude barrels loaded in August are poised to maintain stronger fundamentals in the month thanks to resilient cracks in middle distillate products, despite a longer loading schedule for Malaysia’s flagship crude Kimanis, traders told S&P Global Commodity Insights on June 17.
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“The demand is there, the buyers are multiplying thanks to the good margins on the products,” said a regional crude oil trader.
Seven shipments of 605,000 barrels of Kimanis are expected to be loaded in August, compared to five shipments for July last month, according to traders. The usual cargo size of Kimanis crude is 600,000 barrels.
According to a crude oil trader, the observed difference in cargo size for barrels loaded in August was intended to meet terminal requirements and is unlikely to be a permanent change in the future.
Second-month Singapore Platts diesel and jet fuel crack spreads over Dubai crude have averaged $51.93/bbl and $46.87/bbl so far in June, rising from $36.52 /b and $31.57/b, respectively, in May, data from S&P Global showed.
“Cracks don’t go down, offset is too strong,” said a crude oil buyer.
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Following the release of Malaysia’s Kimanis loading schedule, Brunei Energy offered its cargo for loading from August 3-7 through a tender that closed on August 16 with validity the following day, sources said.
“You never know how high [the premiums will be]rich in regional diesel [crudes] will be strong, hard to say, but should be above $1.50/bbl for [August MCO OSP]“said a crude oil trader.
Earlier in the week, traders were heard pricing barrels of Kimanis crude loaded in August at a $12/b premium to dated Brent, FOB.
On Vietnamese crudes, traders are also awaiting clarification on the results of PetroVietnam Oil’s Chim Sao and Ruby crude tenders, where cash premiums are expected to rise by a notch this month.
“The Ruby market is still going strong, and Chim Sao is around $1/bbl above Ruby,” said a regional crude oil trader.
While high freight rates and offshoring near record levels could hamper arbitrage flows to Asia, traders said some refiners could still choose to tap into West African and Mediterranean cargoes if regional premiums crude are too expensive.
“Compared to last month, production of regional crudes is becoming more stable. Cash bonuses may increase but not too much,” said a crude oil trader.
Demand should improve
Robust middle distillate cracks are expected to hold as recovering demand supports the middle distillate complex, which could keep the middle sweet crude complex in Asia Pacific elevated.
Platts FOB Singapore 10ppm Sulfur Gas Oil Cargo and Jet Fuel/Kerosene Cargo Cracks vs. Dubai First Month Cash Averaged $60.42/bbl and $49.47/bbl in June to date , down from $45.31/b and $34.83/b in May respectively, S&P Global data showed, reflecting the growing attractiveness of middle distillate barrel production.
Product cracks for both distillates have reached record highs as most countries in the Asia-Pacific region roll back COVID-19 restrictions to adopt an endemic and vaccine-supported approach to the virus, leading to an increase in the demand for transport.
The recovery in diesel demand was also supported by the recovery of the industry and construction sectors in most countries, as they aim to revive their economies after COVID-19.
As diesel supply increases in Asia as refineries across Asia maximize their diesel yield to capitalize on lucrative distillate cracks, and East-West arbitrage lanes shut keep more barrels of diesel Asian markets stuck in the region, market sentiment remains strong as recovering demand in the region provides ample scope to absorb the increased supply.
“I feel like demand will continue to improve in many countries…[and] so will supplies as long as refineries are able to operate,” said a Singapore-based diesel trader. [and] low and high premium [level] won’t last long.”
Jet fuel sentiment is slightly positive
Meanwhile, for jet fuel, pent-up demand for international travel has boosted demand for aviation fuel, sources noted.
Additionally, a deeply negative reclassification gap has led refineries across Asia to limit jet fuel production, limiting the availability of distillate supply and further boosting the jet fuel market.
At the Asian close on June 16, Platts Singapore’s first-month make-up swap – the value of jet fuel commands over 10ppm sulfur gas – widened to a two-week low of minus $8.40/bbl , according to data from S&P Global. The spread was last priced at minus $11.30/b on May 31, according to data from S&P Global.
“Yes, it’s true that refiners maximize diesel [output] than jet due to better refining crack margins,” said a Singapore-based regional trader, adding that higher jet fuel production was previously expected in North Asia when the turnarounds end, but that due to some” refiners experiencing problems, [there has been] a slight impact on the volume of production”.
Reduced supply, combined with a still-viable arbitrage economy to move barrels of jet fuel from Asia – particularly from the Persian Gulf – to Europe, has helped keep global supply balances in check, even as Jet fuel demand has been on an upward trend with more airlines adding flight schedules and reporting higher passenger numbers each month.
For the month to date, the cash differential for kerosene/kerosene cargoes for loading from Singapore averaged $3.49/barrel premium to Platts Singapore’s average kerosene/kerosene valuation, data from S&P Global showed at the June 16 Asian close, above the $3.26/bbl premium on average in May.