Saudi Arabia Poised for Record Heavy-Crude Premiums on Fuel Oil
Rising demand for fuel oil is allowing Saudi Arabia, the world’s biggest exporter, to sell its lowest-grade crude at record premiums to buyers in Asia.
Saudi Arabian Oil Co., the state-owned producer, is likely to offer Arab Heavy oil for January at 25 cents a barrel more than benchmark Oman and Dubai crude when prices are announced next week, up 50 cents from December, according to the median estimate of nine refiners surveyed by Bloomberg. Arab Medium may be set at a premium of $1.60, or 40 cents higher. That would be a record for the two grades and the first time Arab Heavy is sold at a higher price than its marker.
China’s growing fuel-oil demand, combined with rising tax on Russian exports, pushed Asian prices for the heating and shipping fuel to the highest level in almost two years in November and boosted refiners’ need for crude rich in the oil product. That has made deliveries of Dubai crude for next-month more expensive than later cargoes, a price relationship known as backwardation, and encouraged Saudi Arabia to sell future deliveries of its own oil at higher premiums to make up for the lower benchmark price.
“The crude market in Asia has become tightened on the back of strong demand from China and other Asian countries,” said Osamu Fujisawa, an independent oil economist in Tokyo who worked for 30 years at the Saudi Arabian oil company, which is known as Saudi Aramco. “The main reason why Saudi Aramco will raise prices is because of the Dubai backwardation.”
Dubai for next month cost $2.02 a barrel more than deliveries in three months this week, the steepest backwardation in two years, according to data from PVM Oil Associates, a London-based broker. The spread has averaged 38 cents this year.
Fuel-Oil Strength
China’s imports of fuel oil climbed 4 percent in October from a month earlier, data from the country’s Customs General Administration showed. The nation’s purchases may rise 23.8 percent this year to 28.49 million metric tons and 19.5 percent in 2012 to 34.07 million tons, Zhu Jiasheng, an analyst with C1 Energy, said in Qingdao, China, on Nov. 24.
The average loss from producing fuel oil in Singapore was $3.63 a barrel in November, the smallest since February 2010, according to PVM. Producers typically accept losses from making it because it’s a residue of the refining process that companies can offset with the profit from higher-value products such as gasoline, diesel and naphtha.
Singapore fuel oil’s discount to crude, called the crack spread, is “good,” Abolfazl Rostami, responsible for marketing of petroleum products at National Iranian Oil Co., said Nov. 28. The market tightened after Russia imposed an export tax on the fuel and Iran upgraded its refineries, cutting output, he said.
Russian Tax
Russia announced new taxes starting Oct. 1 designed to encourage higher-value exports such as crude, while discouraging sales of fuel oil. The decision may cut the country’s shipments next year by about 100,000 barrels a day, or 10 percent of its output, JBC Energy GmbH, a Vienna-based researcher, estimated in September.
China will double sales of tax-free ship fuel, or bonded bunker fuel, by 2015, according to China Petroleum & Chemical Corp., or Sinopec, the nation’s largest refiner. Chinese demand for bunkers may climb to 13 million tons next year from 11 million tons this year and 9.1 million tons in 2010, Shao Lei, a sales director at the fuel-oil unit of PetroChina Co., the nation’s biggest oil company, said Nov. 24.
Oil demand in China, the world’s biggest energy consumer, rose 1.45 percent in October from a year earlier to 9.086 million barrels a day according to data compiled by Bloomberg. The country’s crude purchases from Saudi Arabia jumped 16.3 percent in October to 4.6 million metric tons, the highest since December 2009, customs data show.
China Demand
China’s biggest refineries ran at 87.7 percent of capacity in the two weeks ended Nov. 24, up 2.8 percent from the previous period, according to Oilchem.net, a Shandong-based energy information website.
About 500,000 barrels a day of refining capacity is scheduled to start next year in India, the world’s fourth- largest energy consumer, according to estimates from JBC Energy. More than half of that is scheduled in the first quarter, JBC said in a note on Nov. 24.
“Prospective refining capacity additions in India as of 2012 may up the amount of Middle Eastern crude purchased by companies considerably,” JBC said. Saudi Arabia will increase oil shipments to some Indian refiners next year as they add plants and seek alternative supplies after a payment dispute with Iran, four people with direct knowledge of the plans said Nov. 15.
‘Bullish Outlook’
“Looking forward, the outlook for sour grades remains decidedly bullish,” JBC said in a Nov. 28 note.
Saudi’s so-called light crude is typically more expensive than heavier oil because it’s easier to turn into higher-value products such as gasoline. Saudi Aramco, based in Dhahran, may raise its Arab Extra Light price for January by about 10 cents to a premium of $4.05 barrel above Dubai and Oman, according to the Bloomberg survey. Arab Light may also climb 10 cents to $2.60 above the benchmark price.
Crude shipments from Saudi Arabia to the Asia-Pacific region were 4.26 million barrels a day in 2010, or about 64 percent of total exports, according to OPEC’s annual statistical bulletin. The country pumped 9.55 million barrels a day in October, according to a Bloomberg News survey of oil companies, producers and analysts.
Dubai and Oman crudes averaged $108.41 a barrel yesterday, according to data compiled by Bloomberg, up 22 percent this year. Middle East oil exporters such as Iraq, Kuwait and Iran set their official prices based on changes to Saudi levels.
To contact the reporters on this story: Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net
To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net
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