Oil Refiners Pay Huge Premiums to Replace Middle East Crude

ofi]dkm6skm912ohvs8x7{8b_media_dl_1.png ICE Futures Europe, Bloomberg

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(Bloomberg) — Oil refineries are paying increasingly huge premiums to snap up particular types of crude they need to replace missing cargoes from the Middle East, in a sign of how the Iran war is causing convulsions across the global market.

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Away from well-known oil futures markets like Brent and West Texas Intermediate, there are several hundred lesser-known crudes whose prices normally track to within a dollar or two of international benchmarks. 

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But those differentials are now ballooning to premiums of $10 a barrel or more as oil refiners — especially in Asia — urgently try to secure replacements. 

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Physical crude premiums matter because they demonstrate supply-demand balance, influence refinery buying decisions and drive trade flows. 

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The prices demonstrate yet another pinch point in the global energy industry system caused by the effective closure of the Strait of Hormuz, the world’s most important oil channel, as well as Iran’s attacks on its neighbors’ infrastructure.

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In Southeast Asia, smaller streams like Malaysia’s Labuan crude, Indonesia’s Minas, Vietnam’s Bach Ho have risen to premiums of more than $10 a barrel above Dated Brent, traders said. In normal times, they track within a couple of dollars, they said.

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Meanwhile, US crude delivered into Asia is now trading at premiums of $12 to $15 a barrel to Dated Brent on arrival basis, a level not seen in years. With fuel prices outpacing those gains, refineries are still making huge processing margins if they can find crude.

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“There was perhaps a little bit of hesitation from the overall refining world in recent weeks as the situation unfolded,” Neil Crosby, head of research at Sparta Commodities. “But now it’s becoming clearer that Strait of Hormuz isn’t opening for the time being, and cracks are sky high, refiners can start to pay up for crude in a big way.”

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Asian refiners have bought the most US crude in three years over recent sessions, scooping up about 60 million barrels for April loading. That demand to send barrels East has bled into freight rates, with Aframax rates spiking in recent days as traders look to secure cargoes to Asia and Europe.

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Norway’s Johan Sverdrup, the best North Sea replacement for Middle East oil, was bid at a record of $11.30 a barrel more than Dated Brent on Thursday. It was previously at about parity, or at a small discount to the marker.

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Another good alternative, US Mars crude, jumped to a record of $11 a barrel above benchmark futures in early March and remained at a historically high level of $6 on Thursday, according to Link Data Services. This compares with a slight discount a month ago. 

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Refiners across China, South Korea, India and Southeast Asia have broadened their search to include crude from West Africa, the North Sea and the Caspian region. 

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Despite the surge in purchases, substituting Middle Eastern crude remains challenging. 

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Many Asian refineries are optimized for so-called heavy, sour grades from the Persian Gulf and cannot switch to lighter, sweeter alternatives often found in the Atlantic Basin. 

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That has further boosted premiums for compatible grades such as Johan Sverdrup and Mars, which offer closer substitutes and therefore attract extra demand.

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—With assistance from Charles Gorrivan.

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