Leading crude exporter Saudi Arabia is capitalizing on refining profits by importing substantial volumes of low-cost Russian diesel and subsequently shipping record-breaking quantities to Singapore.
Ship-tracking data reveals the strategic move employed by Saudi Arabia to maximize profit margins amidst evolving market dynamics.
In response to the European Union’s ban on oil product imports as a consequence of Moscow’s invasion of Ukraine, Russia has redirected its previously dominant product market in Europe.
Consequently, Saudi Aramco, the state oil giant, has significantly increased its import arrivals in Singapore during May, leveraging favorable arbitrage netbacks in the Asian market.
Analysts and traders attribute this surge in imports to the tighter supply in Asia resulting from regional refinery maintenance, coupled with the growing diesel supply from the Middle East.
According to Serena Huang, the head of APAC analysis at Vortexa, the diesel supply in Singapore is comparatively limited due to refinery maintenance in the region. Concurrently, the Middle East is witnessing a rise in diesel supply, which creates potential spot arbitrage opportunities for traders to redirect the cargoes to Singapore.
Evident from trading sources Kpler and Refinitiv, Saudi Arabia plans to import over 500,000 tonnes (3.7 million barrels) of Russian diesel in May, with the majority arriving at Ras Tanura, one of Saudi Aramco’s refineries.
Additionally, data from Refinitiv, Vortexa, and two industry sources indicates that diesel shipments from Saudi Arabia to Singapore are projected to reach an unprecedented level of 400,000 tonnes.
This surge in Saudi supplies is expected to offset the decline in exports from northeast Asia during the refinery overhaul season between May and July.
It remains unclear whether Saudi Arabia is storing a portion of its own production and primarily shipping Russian supplies through swap trades, given that both meet typical diesel specifications.
According to trade sources and Refinitiv data, Russian 10 ppm sulphur gasoil cargoes are traded at approximately $30 per barrel below Middle East quotes on a free-on-board basis. Conversely, Asia commands a spot premium for the same grade, with 16 cents per barrel above Singapore quotes. This pricing discrepancy has further fueled Saudi Arabia’s interest in the Asian market.
Globally, Saudi diesel exports reached a record high of around 3.7 million tonnes in April, as indicated by Kpler data. The Jizan refinery, exclusively owned by Aramco, was expected to ramp up diesel exports once crude runs stabilize.
Experts such as FGE analyst Lu Yawen assert that an increasing number of Middle East gasoil cargoes are now heading eastward instead of westward to Europe. Europe’s high inventories and sluggish economic growth have contributed to depressed prices in that market.
The arbitrage flow has been facilitated by falling freight costs, according to two other oil and shipping analysts. The cost of chartering a Long Range (LR) vessel on the Middle East to Singapore route has decreased to slightly below $25 per tonne from around $34 per tonne over the past two months. This figure is roughly half the cost of shipping the same vessel to Europe.
The global diesel market has experienced an upturn since the beginning of 2023, with China and the Middle East ramping up exports. Additionally, mild winter conditions in Europe have curbed demand, resulting in price reductions.
Refinitiv Eikon data demonstrates that Asia’s 10 ppm sulphur gasoil spot premiums and refining margins have declined by more than $8 and $1.50 per barrel, respectively, over the past two months.
Energy Aspects notes that the expected additions of refinery capacity of 700,000 barrels per day this year will further strain gasoil margins east of the Suez.
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