Despite being only 9 months in, this year has provided us with a rollercoaster of developments on the oil market and upended the market’s usual understanding of where crude differentials ought to be. Yet perhaps some of the newly-emerging trends will stay with us a little longer than one might expect and nowhere is this presupposition more likely than in the light-heavy sweet pricing dynamics in Asia. Freshly into the new world of IMO 2020 requirements, the first months of 2020 have elevated almost all of Asia’s sweet grades amidst the closing of arbitrage flows – at that period freight rates were ballooning into double their usual level. By May 2020, however, heavy sweet differentials have started to reach all-time highs and nowhere was it truer than with Australia’s crude exports.
Historically, one would seek for the world’s most expensive crudes in Malaysia. There, grades like Tapis, Kimanis and Kikeh would be generally at least 4-5 USD per barrel above Brent, largely due to their superior refining characteristics. In fact, a little less than 3 years ago I’ve written an article here stating that Tapis was the most expensive crude globally due to its extremely low Sulphur content and the specificities of the Southeast Asian crude market. Today Malaysian differentials have given away the garland of superiority to Australia’s heavy sweet crudes, such as Vincent or Van Gogh – oddly enough, premia as high as +31 USD per barrel to Dated Brent are a direct consequence not of the crudes’ refining value but rather their blending utility.
Graph 1. Vincent and NW Shelf Condensate against Dated Brent in 2020 (USD per barrel).
The shift turned quite tangible with the introduction of IMO 2020; for a market as profitable as the Asian shipping market Australian low-sulphur heavy grades turned out to be an ideal solution. As opposed to regional competitors blending Vincent or Van Gogh into the low sulfur fuel oil pool is rendering the final marine fuel fully compliant with IMO 2020 0.5% Sulphur requirement. Not only did Australian heavy crudes turn out to be uniquely well-placed for the Asian LSFO market, to avail oneself of such crudes it is no longer necessary to carry out a massive blending campaign in Singapore or other hubs, oftentimes the blending would take place onboard the given vessel – the Australian grades would be mixed with the usual marine fuel whose Sulphur content is above 0.5%, to create a blend that is fully IMO 2020 compliant.
Graph 2. Australian Crude Exports in 2017-2020 (‘000 barrels per day).
Apart from the IMO 2020 requirements, Australian grades also happen to have great flash points, hence minimizing risks that any sudden fuel ignition would cause problems to the vessel’s engine. Additionally, their pour point is also low – in stark contrast to African heavy sweet grades like the Chadian Doba which routinely wield pour point levels well above 0° C (Doba has a pour point of +27° C, the lighter Angolan Cabinda wields +18° C). Van Gogh’s pour point level stands at -15° C, Vincent’s hovers around -17° C whilst Pyrenees’ is at -35° C. When Santos’ sale of an Aframax cargo of Pyrenees this March yielded a +31 USD per barrel premium to Dated Brent (the cargo was reportedly sold to a Japanese firm), all of the above has played out to create the world’s most expensive crude.
Some years ago, when Heavy Sulphur marine fuel market was not threatened by the imminent IMO 2020 standards, heavy sweet Australian grades would traditionally go to sophisticated Indian and Chinese refiners that could handle their density, with a small but steady stream of deliveries to the United States. For instance, 5 years ago almost all of the Pyrenees export stream went directly to China – this year, however, all but one cargo was supplied to Singapore (the remaining one went to Saudi Arabia). This Singapore-oriented trend can be seen across all heavy sweet Australian grades and explains to a large extent the high differentials, moreover, in some cases the oil producers have sought to improve the flash points of their crudes to render them even more attractive on the marine fuel market.
Graph 3. Share of Vincent Exports Going to Singapore in 2017-2020 (‘000 barrels per day).
One of the main crude grades to witness the IMO-2020-induced differential appreciation, Vincent, was restarted in 2019 after a year’s maintenance on the field itself, just in time to reap the benefits of being one of the most-coveted crude types in Asia. Woodside Petroleum, the operator of the production license WA-28-L that contains the 73 MMbbls Vincent field, has effectuated a really timely maintenance on the asset in 2018/2019. Vincent went offline for one year starting from May 2018, as Woodside refitted the Ngujima-Yin FPSO so that it can accommodate also three other fields around Vincent. At that time media reports have stated that the one-year maintenance would not have a “massive impact” as the 17° API density crude had limited crude outlets because of its heavy nature.
For Australia in general this creates a bit of a head-scratcher, given that it is condensate and light crude production that has been generally on the increase whilst output from fields that yield heavy sweet crudes move in the opposite, declining, direction. Australia’s condensates (as can be seen in Graph 1 with NW Shelf Condensate) have suffered greatly from the plummeting of light distillate refining margins in April and just when it seemed that demand might be picking up again as August witnessed the first month of positive Singapore refining margins, the second coronavirus wave struck. Thus, despite being really suitable feedstock for gasoline blending and petrochemical production, Australia’s condensates trade 9-10 USD per barrel lower than its heavy sweet grades.