Resid conversion is carrying the low sulphur complex

Sulphur curves

In Singapore, you get two observed points on the sulphur curve with Hi5 while in Rotterdam, you get three points with Hi5 and Lo5 but extrapolating from those points to a proper curve is always a bit of a pain.

Everyone knows the sulphur curve exists in some non-linear shape but I finally had the time to make an actual one this week based on blending economics. The idea behind it is that you can try to make the lowest cost blend from all the components available in each region that would conform to something similar to RMG specs but with sulphur at 0.20%, 0.21%, 0.22%,… all the way to 5.0%, with 1.3–1.4% being a rough cut off between the low and high blend pools.

Then you can calculate the blend cost for each sulphur level as a diff to the 0.5% VLSFO RMG blend. This would give a blend costs-based measure to not only Hi5 and Lo5 but also to any point on the curve. This takes into account certain technical constraints as well, e.g. too much slurry could destabilise your low sulphur blend too much.

So what does that say about Hi5 and Lo5?

In Singapore, this sulphur curve says that for Aug, blend costs-based Hi5 should be around $150/mt right now vs the $165/mt it’s trading at while 1% LSFO should be a rough $60/mt discount to 0.5%.

For Sep, which is less certain than Aug, our Hi5 measures just below $130/mt at current blend economics vs $135/mt in market and 1% LSFO at a $55/mt discount to 0.5%.

Given Hi5 liquidity, I’m not too concerned about a $5 or even $10/mt difference but it does seem Aug Hi5 may be a tiny bit over-valued from this perspective.

ARA is the opposite where Aug blend-based Hi5 is roughly $135/mt vs $130/mt in market, which is negligible. What is interesting is that Aug blend-based Lo5 is just around a $70/mt discount to 0.5% from a blending perspective whereas market is just above $100/mt.

The difference is significant enough to pay attention to here and it seems to suggest 1% being quite under-valued relative to 0.5% i.e. Rott Lo5 is over-valued.

Perhaps part of what I’m missing in the equation is taking into account the premiums on 0.5 and 1% physical cargoes below with 0.5 premiums still pretty firm and Rott 0.5 Barge Aug/Sep at $33/mt and Sep/Oct at $26/mt respectively.

Having said that, this is still a bit of an experimental tool I’m working on so please take it with a big pinch of salt.

Conversion margins

Back to our more familiar territory. The pull into resid conversion in the East is unquestionable.

Our familiar chart below shows the margins for Dar Blend into more complex refining kits in North Asia far exceeding that into the topping units (for bunker blending later) in Southeast Asia. Dar should continue heading into conversion in the North East at these levels.

And of course that also explains the recent Dar re-sold at ICE + $10/bbl.

It’s the same story if you look at standalone RFCC conversion margins in Southeast Asia – we are back to the range we saw earlier this year, which far exceeds the 5-year seasonal highs.

We see a similar story for Europe using Skikda LSSR landed levels as a proxy for historical comparison.

Resid destruction/conversion is undoubtedly very supportive for the low sulphur complex at these levels.

Arbs

Aug 0.5 EW made another run for $100 in recent days and I was tempted to take a look and see if it’s over-valued. The reality is that even with EW at $100 at Sing cash at +37, Rott-Sing arb is still fully shut by some $40–50/mt and part of that is because you’re paying a massive amount for structure with spreads so strong.

What that suggests is simply that West to East arbs will not give you a hard ceiling on EW at these levels (unlike what we saw in early June).

By the way, Dangote supposedly started running full again last week. At 700 kb/d on an 80% Nigerian crude and 20% other WAF or WTI diet, and assuming the RFCC runs at 85%, you get roughly 100 kt of LSSR and 40 kt of slurry (or a Suezmax in total) a month for exports – not a whole lot.

In addition, at where we are right now, personally, I’d probably take Dangote to the West for secondary feeds. The chart below shows the estimated secondary margins for running Dangote in NWE – these margins have gotten real spicy again the last two weeks.

Sing is trying to compete too but it’s going to be hard looking at feedstock margins into the West above. Into Singapore blending, if you use the sulphur curve you get roughly +$50/mt vs VLSFO for 0.25% sulphur. Add another $35/mt in cargo premium, then you get to roughly +$85/mt as the fair landed value for mid-Sep.

That is also exactly what we’re projecting for Sep using the breakeven blender method.

If you work that backwards at the current $100/mt EW and $60/mt spreads, you can pay Rott 0.5 Barge + 45–50 FOB for Dangote and still seemingly break even into Sing blending.

This is kind of a roundabout way of looking at this but Western refiners seemingly can afford to pay so much more now, which means that Dangote FOB diffs should firm up and because Dangote trades as a diff vs Rott Barge, it implies that if Sing wants to pull, EW has to firm even more than that to compete.

Mid sulphur

Shouldn’t come as a surprise but Asian mid-sulphur is looking firmly into the low sulphur blend pool at these levels at least through Aug and Sep – not a particular concern to me at the moment with other things going on.

In conclusion, Sing 0.5 has gotten a lot stronger in recent days and it may feel tempting to call the top on the complex but I actually don’t find enough reasons to do so here unless we see clearer developments.

Having said that, I do think the strength is hinging pretty much on the pull from resid conversion, which (at risk of saying the very obvious) implies that anything wobbling the Hormuz closure narrative can unravel the whole complex quickly.

About the Author
Hoa Nguyen | Commodity Owner, Fuel Oil
Hoa brings extensive experience, having led fuel oil analysis at Trafigura and worked across crude, diesel, and APAC power markets. Hoa now leads the development of Sparta’s forward-looking tools for fuel oil and feedstocks.

About Sparta

Founded in 2020, Sparta made waves in the commodity analytics space in March 2022 when it secured a $6m series A investment from Singular. This success then later snowballed into a further $17.5 million in a series A funding round led by the technology venture capital firm FirstMark, with participation from existing shareholder, Singular.

The platform, created by former traders Miles Moseley and Felipe Elink Schuurman, is designed to answer a common problem shared by most traders: 90% of pricing data required to make trading decisions is kept in silos and shared manually by voice, email, or chat.

Sparta breaks these existing data silos and combines the physical and paper markets to provide traders with live access to global raw prices, from futures and swaps to forward freight and physical premiums. We work with clients globally, including Philips 66, Chevron, Trafigura, Equinor and more.