Murban Oil Differentials Dip At Year-End on Cusp of IMO 2020

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(Bloomberg) -- Spot price differentials for Abu Dhabi’s Murban crude are dipping toward the end of the year as the world’s top refiners seek out other types of crude ahead of a historic ship-fuel overhaul.

Murban is prized for its light- and middle-distillate yield, but the grade’s spot premium has dropped relative to its official selling price in recent days as Asian refiners focus on purchasing oil that produces more low-sulfur, high-viscosity marine fuels due to the impending IMO 2020 rule change. As well, rising supertanker rates are making supplies from closer by in Russia’s Far East and the Asia-Pacific more attractive than crude from further away.

Murban Oil Differentials Dip At Year-End on Cusp of IMO 2020

Ships are mandated to use fuels with 0.5% sulfur or less from Jan. 1 and rising demand for IMO-compliant products such as very-low sulfur fuel oil are prompting refiners to bid up crude that can yield more of such output. Grades such as Russia’s ESPO have become more favored as a result this month, according to four traders and refiners. The increase in demand for blending into low-sulfur fuel oil is also pushing up prices for Australian heavy grades Van Gogh and Pyrenees.

Murban for February traded at a discount of 15 cents against its official price on Thursday, dropping from a 25-cent premium just days before.

The decline has coincided with an increase in the rates for very-large crude carriers shipping oil from the Middle East to China, which have risen to a two-month high. That’s giving additional impetus to demand for nearby crudes such as ESPO, which is trading at a premium of $8 to $8.40 a barrel over benchmark Dubai crude, the highest in about two months.

“The short term volatility we are seeing at the moment is ‘business as usual’ for a spot market product,” Abu Dhabi National Oil Co., the main producer of Murban, said in an email. “In the long term, we see a solid and growing demand for Murban. As a light crude with sulfur content of less than 1%, it is a highly attractive grade based on IMO regulations. In fact, the Murban trading differential is up significantly as a result of IMO regulations, which is a reflection of growing demand.”

Distillates Disappoint

This month, the popularity of Murban and other similar crude has been eroded as processing profits from gasoil were at an average of $15 a barrel so far in December, about 10% lower than the average for the second half of the year. While Murban at a discount isn’t good news for term lifters, buying interest could reemerge should spot differentials fall further or official prices decline.

Murban Oil Differentials Dip At Year-End on Cusp of IMO 2020

Marine gasoil was previously seen as the biggest beneficiary from the industry’s scramble for IMO-compliant fuels, though shippers have so far gravitated to VLSFO due to its high viscosity that aids engine performance. Vessels that ply long-haul routes -- from Europe or America to Asia -- are particularly in favor of this option, according to Abhishek Nambiar, an oil market analyst at FGE.

See also: Momentous Shipping Fuel Shake-Up Playing Out in Unexpected Ways

Low-sulfur diesel as shipping fuel is “losing its status as an IMO golden child,” wrote Bank of America Merrill Lynch analysts in a Dec. 13 note. Gasoil crack spreads have averaged $16.70 a barrel so far in the second half of 2019, versus an estimate by Goldman Sachs Group Inc. in August set at $17.60 for the six-month period.

©2019 Bloomberg L.P.

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