The Asia Pacific sweet crude market is expected to stay on a downward trajectory as it faces more competition from falling West African crude prices and an oversupply of regional spot cargoes, traders said this week.
Perpetually weak refining margins and low buying demand have also hampered the Asian market, they added.
With West African crude grades seen as fungible alternatives to Asian sweet grades, traders said poorer economics in the West African market would boost competition in an already long Asia Pacific market.
West African "cargoes will need to look for more outlets here in the East if they struggle to get placed in their own natural market," said a sweet crude trader with a Western trading house. "That said, their [differentials] will fall, and if they come to Asia that will put pressure on [regional sweet crude] differentials."
Market sources said plenty of regional crude cargoes were available for spot purchase in Asia. However, most if not all buyers have concluded their June-loading requirements.
"The market is long cargoes," a Singapore-based sweet crude trader said. "Buyers are done for their June requirements, but several of the May cargoes are still around."
It remained unclear which grades were available for May loading.
For June-loading spot cargoes, sources said Vietnamese grades like Su Tu Den, Rang Dong, Ruby, Bach Ho, Te Giac Trang and Bunga Orkid remained available.
Malaysian grades Labuan and Kikeh were heard to be looking for homes for June loading, in addition to one to two Australian North West Shelf condensate cargoes for June.
REFINERS SAY PRODUCT CRACKS TAKING TOLL ON MARGINS
Indonesian grades Minas, Cinta, Widuri and Duri remained available for spot purchase, according to traders.
"Minas for May is still possibly available," a source said. "I hear some of the grades are going to be put into storage as there is simply no demand."
Several refiners confirmed that weak product cracks have taken a toll on their margins and limited their demand for crude purchases.
"The Chinese and Japanese are not buying, even the regional refiners have slowed down considerably," a crude oil trader at a refiner said.
A Chinese crude oil trader said that Sinopec is expected to cut runs this quarter.
"I don't know how much they are cutting, but I believe all refineries in this region are cutting with product margins so bad," a crude trader with an oil major said.
Since mid-February, distillates and naphtha cracks have weakened while the fuel oil crack strengthened, according to Platts data.
The July jet and gasoil to Dubai swap cracks were assessed at $15.41/barrel and $15.44/b on Tuesday, down $6.01/b and $6.05/b since February 15, when they were assessed at their highs of $21.42/b and $21.49/b, respectively.
The July naphtha to Dubai swap crack was assessed at minus $9.64/b Tuesday, a drop of $9.16/b since its high of minus 48 cents/b February 15.
Despite the rebound in fuel oil cracks, traders said it has hardly helped to support the medium-heavy Asian market, mostly crude grades from Vietnam and Indonesia.
The July fuel oil/Dubai swap crack was assessed at minus $3.68/b Tuesday, gaining $4.378/b since its low of minus $8.058/b February 15.
"Direct burning demand in Japan is slow and that alone is killing" the differentials, said a source from a Japanese trading house. "It's hard to pay up for medium-heavy grades even if fuel oil has strengthened."
Traders said they expect the market to head lower.
"The overhang has to clear," one source said. "The market has to correct itself and crude [differentials] will have to fall."
They added that product margins would also have to improve before cargoes can get cleared.
"There needs to be real demand for your crude," said a sweet crude trader with a trading house. "But even if product margins pick up, the market will still remain depressed for a while. There is a lag effect."
