Cash differentials for Far East Russian crudes rallied to multi-month highs Tuesday morning in Asia, as regional refiners showed strong preference for short-haul crude cargoes amid rising freight rates, while China's tougher rules on pollution stoked strong demand from Chinese end-users for low sulfur crude grades such as ESPO Blend and Sokol.
S&P Global Platts pegged second-month, December, ESPO notionals at a premium of $3.40/b to front-month Dubai crude assessments at 11 am (0300 GMT) Tuesday, the highest level since March 28 when it was assessed at $3.70/b.
Light sweet Sokol crude notionals at 11 am were at a premium of $4.20/b to the December average of first-line Dubai and Oman assessments, its highest level since September 16.
Regional traders said a combination of upside factors contributed to the latest bull run in the Far East Russian crude complex, including tighter supply of Sokol crude for December.
Market sources noted that a total of 11 Sokol cargoes, each 700,000 barrels, are expected to load over December, with Russia's Rosneft, Japanese consortium Sodeco and oil major ExxonMobil each holding three cargoes, while India's ONGC Videsh Limited has the remaining two cargoes.
In November, a total of 12 cargoes of Sokol crude of a similar size are scheduled to be exported out of DeKastri terminal at Sakhalin-1.
The main source of price support, however, came from robust Chinese demand, traders said.
Both state-run and independent refiners from Asia's biggest energy consuming nation snapped up a vast majority of December-loading ESPO blend crude cargoes offered so far in the current trading cycle and demand for sweet Russian grades could grow further as China aims to tighten sulfur limits on vehicle fuel.
"[Chinese refiners are] focusing more on sweeter grades for December due to the product upgrade planned for next year," said a North Asian crude trader.
CHINESE FAVOR LOW SULFUR RUSSIAN GRADES
China's growing awareness on environmental issues and the nation's battle against air pollution could be a boon for Far East Russian crude suppliers, market participants said, indicating that the Chinese authority's move to tighten emission standards for vehicles could lead to increased demand for high-quality, low-sulfur Russian crude grades as regular refinery feedstocks.
"I hear that [Chinese independent] teapot refiners have less than 1% sulfur requirement [for most of their December crude intake] this month. So we might see a lot of ESPO go to them," said a Singapore-based crude trader.
ESPO blend has a sulfur content of 0.62% weight, while Sokol crude has sulfur content of just 0.18%.
The National Development and Reform Commission mandated a nationwide roll-out of National Phase 5 emission standards, with a deadline of January 1, 2017.
China's Phase 5 emission standards for motor gasoline and gasoil are equivalent to Euro V emission standards and caps the sulfur content at 10 ppm.
Around 11 provinces and major cities in southern, eastern and northern China have already adopted the National Phase 5 emission standards from January 1 this year.
The majority of Sinopec refineries have achieved National Phase 5 gasoline production capability.
Due to inevitable RON loss in the desulfurization process, Chinese refineries prefer to process lower sulfur crude to retain as much octane as possible, industry experts said.
Latest market talk indicated that Switzerland's Tenergy Trading could have sold a 100,000 mt cargo of ESPO blend crude for loading over December 6-12 to a Chinese company, at a premium of around $3.30/b Platts front-month Dubai crude assessments, while Rosneft was heard to have sold via tender two 100,000 mt cargoes for loading over December 1-6 and December 21-26 to Chemchina at a premium of around $3.40-$3.50/b.
In the previous trading cycle, most of the November-loading ESPO crude cargoes received premiums of $2.2-$2.8/b.
SHORT-HAUL FREIGHT ADVANTAGE
Meanwhile, traders said the recent spike in VLCC, Suezmax and Aframax freight rates has been working in favor of Russia's Asian export grades like ESPO, Sokol and Sakhalin Blend, as the big three North Asian consumers -- South Korea, China and Japan -- were more likely to take Far East Russian crude and save on transportation costs as it is a short-haul route.
Industry sources noted that the voyage time from the Far East Russian port of Kozmino to North Asia is less than four days versus 10-15 days from Southeast Asia and Oceania, and up to 30 days from Persian Gulf ports.
The short voyage also makes it economically viable to import smaller Aframax cargoes of about 700,000 barrels of crude, rather than the regular Suezmax and VLCC cargoes that typically are more than 1 million barrels.
"Every refining company has a monthly procurement budget to work with ... if you could cut down on transportation bills, sure why not," said a trader with a Japanese refiner, when asked about the company's preference for crude supply from the region.
Sakhalin Energy has sold a total of five cargoes of Sakhalin Blend crude this month.
The cargoes, each comprising 730,000 barrels of the light sweet crude and loading over mid-December to mid-January, was heard sold at premiums ranging from the low to high $2s/b to Dubai crude assessments on a CFR North Asia basis.
Japanese and South Koreans were heard to have picked up around three cargoes, while oil majors Shell and Chevron reportedly purchased one each.
Trade sources also said OVL has sold one cargo of Sokol crude loading over December 14-20 at a premium of around the low $4s/b to the average of first-line Dubai and Oman assessments in December, to a South Korean buyer.
Meanwhile, several traders also pointed out that the cost of transporting lighter crudes is much lower than the delivery fee for more heavier and waxy grades.
"It's not only about the short-haul voyage, but it's also the fact that [ESPO, Sokol and Sakhalin Blend are] non-heated crudes so its [cost effective] for buyers during winter," said a Singapore-based trader.
Most crude grades with API gravity of less than 30 degrees typically require vessels with specialized heating systems during the delivery in winter, as waxy, high viscosity crudes solidify at ambient temperatures.
Sokol, ESPO and Sakhalin Blend have an API gravity of 36.4, 34.8 and 45.5, respectively.
