Discount-to-crude product cracks rise on tight supply

Quantum Commodity Intelligence - Refining margins for naphtha and high-sulphur fuel oil – which typically trade below the price of crude – have moved sharply higher in recent weeks, drawing support from the redirection of Russian supply out of Europe on sanctions.

Naphtha cargoes in northwest Europe are at ten-month highs around $1-2/b below ICE Brent crude in recent sessions. 

Cracks for high-sulphur fuel oil barges in Rotterdam are currently around six-month highs of -$22-23/b. 

Both have been supported by the loss of Russian supply – Europe’s main source of both products – since sanctions on 5 February.

Unlike distillates, where restocking was helped by a surge in imports leading up to sanctions, the economics of shipping naphtha and fuel oil into Europe are much more restrictive – the products usually considered a refinery by-product.

But both are now well above the EU and G7 price cap set at $45/b for products priced below crud. At current prices, non-Russian fuel oil is around $60/b and non-Russian naphtha around $80/b, both on a fob ARA basis.

Russian refiners would likely have to sell both products well below their market value to maintain production of higher value products to sell in the international the market.

An alternative could be to sell naphtha as low-spec gasoline to circumvent the cap. Russian refiners could also send vacuum gasoil (VGO) – an intermediate feedstock currently priced around $10-15/b – into the marine pool, and boost supply indirectly of heavier products.