China’s plan to offer more than 4 million barrels of Forties and Murban crudes from state reserves in the week starting Sept. 19 could mean that the share of light crude grades in the state reserve system could be much higher than expected, Asian refinery and trading sources said. This might be a potential trigger for Chinese refiners to cut down on light sweet and sour crude imports in the fourth quarter.
The National Food and Strategic Reserves Administration announced Sept. 14 it will release 7.38 million barrels of crude oil from state reserves in the first set of auctions planned for Sept. 24.
The number of light-end crude grades released from China’s state reserves surprised sweet and sour crude traders across Asia, as many had anticipated medium and heavy sour grades to make up the bulk of the barrels Beijing plans to offer in multiple series of open auctions in the months ahead.
The NFSRA said about 1.1 million barrels of light sweet Forties crude and 2.95 million barrels of light sour Murban crude are up for grabs in the first auction, making up more than half of the total crude on offer in the first auction. The other grades available are medium sour crudes, including Upper Zakum, Oman Blend and Qatar Marine.
Five lots of state reserve crude for Sep 24 auction:
Various refiners across Asia that regularly compete with Chinese oil companies for sweet and sour crude supply in the international spot market could expect the country’s light crude purchases to ease if Beijing releases more middle distillate-rich grades like Murban and Forties in the domestic market, according to refinery feedstock managers and trading sources in Singapore, South Korea, Japan and Thailand.
“The general assumption was that medium and heavy crudes would make up at least two thirds or around 70% of China’s national reserves since those are Chinese refiners’ main crude slate,” a sour crude trading manager at a major South Korean refiner told S&P Global Platts.
“The higher-than-expected share of light-end crudes to be released in China could perhaps lead to less competition for Murban, Forties and light sweet West African crude oil in the coming trading cycles,” said a crude and condensate trader at a Japanese refiner.
As for Chinese refiners, buying the reserve crude barrels will help them get prompt supplies from the doorstep, instead of the usually long trading cycles of about two months for imports, industry and market sources said.
Global trading companies like Vitol, Mercuria and Trafigura were actively selling off crude from their floating storages when the oil price crash and demand destruction unfolded in second-quarter 2020. China then had snapped up quite a large volume of light sweet North Sea crudes from the companies at low prices, a sweet crude trader at a Western trading house with close knowledge of the matter told Platts.
Winning bids, price spreads
Meanwhile, the Asian refinery and trading sources said they will continue to closely monitor China’s state crude reserve releases and sales prices as the NFSRA auction results would provide an insight into how Chinese refiners generally see value in light-end crude grades relative to more heavier crudes.
Price spreads between lighter grades and heavier crudes are an important indicator for many Asian refiners’ feedstock trading and refining margin strategies, the feedstock managers and trading sources said.
Refiners often calculate the optimal ratio of different types of crude grades they would need to buy in the spot market in a month, based on major Middle Eastern official selling prices and price spreads between light and heavy crude benchmarks, for maximizing refining margins, the sources added.
“The winning bids for the different grades that Beijing is offering in the first auction will give us a sneak peek at what Chinese companies think the right light-heavy crude price spread should be,” said a sour crude trading manager at a state-run Thai refiner.
The spread between winning bids for light sour Murban crude and medium sour Upper Zakum is of great interest as the result could provide some hints on general Chinese refining economics and linear programming models, the trading sources said.
Platts assessed light sour Abu Dhabi Murban crude at an average premium of 60 cents/b to medium sour Upper Zakum crude to date in the third quarter.
The winning bids for Forties crude and Upper Zakum would also be watched closely, and traders said the prices would be compared with the benchmark Brent-Dubai price spread.
The Brent/Dubai Exchange of Futures for Swaps spread — a key indicator of light sweet European benchmark Brent’s premium to the medium-sour Middle Eastern price marker — has averaged $3.60/b to date in Q3 and $2.90/b so far this year.
Source: Platts