Rinse and repeat for 0.5 cracks?

In my low sulphur commentary on 25th March, I argued that Sing 0.5 June and July cracks at $11-12/bbl were under-valued. One and a half weeks later, they hit $20/bbl.

Then just 10 days after, we are back to where we started at $11-12/bbl. Being right or wrong is just timing (duhhh!) but let’s look at some of the factors again.

## Hedging flow

What happened to 0.5 cracks in the last 10 days? A million things happened in the world obviously.

For one, my gut feel is that once cracks hit $20/bbl early in the month, more hedging flow came in from the refining side i.e. short cracks, which is a perfectly rational thing to do if you bake in any degree of normalization.

And we have to remember that this is the segment of the market whose liquidity is a far cry from what we see in diesel or crude so that alone could account for a good chunk of the move down.

But my opinion from the very start of the war is that this is not the kind of conflict that will conclude anytime soon.

Releases from global inventories have helped cushion some of the blow obviously but that can only be a short-term mechanism.

What is the probability of Asian refineries realizing in the coming weeks that they perhaps won’t have enough of the resid molecules and that hedges will need to be unwound i.e. by buying back cracks?

## Feeds vs bunker pool

Now let’s look at some interesting bits. Below is my usual chart showing the difference in margins between resid conversion for something like Dar in the more complex kits in the Northeast vs going into a topping unit, then into the bunker pool in Southeast Asia.

These are some extraordinarily big differences – resid conversion margins are overwhelming what could go into the bunker pool. It is the same story if you look at a proxy for RFCC margins on LSSR in Southeast Asia, or something more theoretical like Dangote into Northeastern feedstock.

With a huge reduction in medium-heavy Middle Eastern crude intake, there is simply not enough resid going around. Even higher volume of WTI or any of the light grades will yield nowhere near enough resid to make up for that.

The RFCC runs will still need to be sustained at their own minimum rates at the very least and at these margins we are seeing, little resid will be available for the blend pool.

## Blend costs and margins

On the other hand, with dirty freight still expensive, forward landed diffs for blend components into Singapore remain firm. And with premiums in the low-20s, forward blend margins for 0.5 don’t look particularly attractive anymore.

And at these premiums, the low sulphur pool is completely losing to the high sulphur pool when it comes to pulling any available mid-sulphur components.

## USGC bunker demand

But then you would probably ask me, what about all those extra ballasters heading to the USGC right now? Would that take away demand from Singapore?

First, the tanker fleet makes up only a portion of bunker sales in Singapore – you still have the much larger container fleet, cargo boats, bulkers, gas carriers and others.

Second, off the top of my head, some 100+ ish oil tankers pick up molecules from the USG monthly (which also makes sense if you take the 4Mbd exports they do in last month divided by some figure between 1Mbbl (for an Smax) or 2Mbbl (for a V).

Now also assume that instead of 100 tankers, you get an additional 100 (so 200 a month in total). Assume also that magically all of them choose to bunker in the USGC instead of Singapore or elsewhere (which is not going to be true). How much demand do you get from that?

A eco-Smax consumes some 25-30 MT/day and a VLCC 30-35 MT/day of bunker. Let’s just assume 30 MT/day as an average figure. Assume they also want to buy enough for 60 days. 30 MT/day * 60 days * 100 tankers will give you 180ktpm additional demand which I’m going to round up to 200ktpm.

That 200ktpm will probably be the upper limit of the additional demand in the USGC that may be lost elsewhere and that’s the best case scenario – big for the USGC but tiny compared to the 4Mtpm+ market we have in Singapore! And historically, shipowners really only bunker in the USGC if they REALLY have to.

And don’t forget Houston VLSFO delivered levels are still a $60-80/MT premium to Singapore, though HSFO is still at a good discount.

All in all, I think 0.5 cracks are under-valued at these levels again and I would expect some upside to the $18-20/bbl range.