While financial headlines watch crude above $100, the quieter signal has been building in straight-run fuel oil — first in China, and now across the wider refining system.
In the late nineteenth and early twentieth centuries, British colliers carried caged canaries into the subterranean shafts of South Wales and Yorkshire.
A canary possesses a specialised, unidirectional avian respiratory tract and a metabolic turnover tenfold that of an adult human.
Confronted with carbon monoxide — colourless, odourless and completely undetectable by human senses — the canary’s perch gave way minutes before the air turned lethal for the miners.
Over the past week, the financial headlines breathlessly tracked Brent and WTI reclaiming levels north of $100 per barrel, attributing the impulse to broad geopolitical risk and the resumption of Chinese demand.
But the headline crude market was not the lead indicator of the latter.
It has been SRFO for a while now, which, like carbon monoxide in a mine, is odourless on the screen.
Two to three weeks ago, Aramco started chartering Suezmax tonnage out of Fujairah to load Straight Run Fuel Oil (SRFO).
Their JV with Sinopec at Gulei was likely their early warning indicator, alerting them to the fact that the Chinese could hold their poker face no longer.
They have burned through the last of their feedstock inventory.
Shortly thereafter, Vitol stepped in with Aframax bookings out of the Gulf.
Then, last week, the rest of the physical trading fraternity followed in lockstep.
The feedstock flow into China — a corridor handled quietly and almost exclusively by the NIOC for years — has effectively cracked open for the broader market due to the US blockade.
It echoes the golden days when we all enjoyed that Bitumen Mixture customs loophole.
Behind an average barrel of Middle Eastern straight-run fuel oil sits approximately 55% heavy vacuum gasoil and 15% middle distillates.
For Chinese refiners, taking an untreated straight-run residue stem and charging it straight to their HDUs is the cheapest, highest-margin route to yielding clean, high-spec diesel, jet kerosene and chemical feedstocks without burning through baseline crude import quotas.
Simultaneously, at the other end of the hemisphere, the US Gulf Coast is behaving as if it were peak driving season.
They too are screaming for straight run.
Just like China, US refiners look at SRFO and see that same 55% VGO offcut.
But instead of directing it to their HDUs for additional/improved distillate yield, the Americans feed that heavy gasoil cut straight into their CDUs to maximise high-octane blend stocks for their gasoline pool.
The irony is acute.
Real physical gasoline demand across the US interior is seasonally softening.
Domestic drivers are hitting the road less as schools resume and autumn approaches.
Yet refining margins are running so hot that they are squeezing every last drop of margin out of that secondary conversion train.
Because we cannot trade an “SRFO Swap”, the trade must be pulled through liquid proxy conduits.
One would need to corroborate this with Marathon or Valero on how the US ledger system works vis-à-vis SRFO.
But assuming physical SRFO is booked against HSFO/VGO diffs versus the US Gulf Coast 3.5% waterborne barges, then as US refiners pull in SRFO to squeeze gasoline, the USGC VGO/HSFO spread should, in theory, widen.
Trading outright gasoline exposes us to macro directionality and the crude rally.
By establishing a synthetic position that models the RBOB Crack against WTI versus the USGC HSFO crack, desks can isolate the refining upgrade value of that 55% VGO molecule.
Connecting RBOB to South Korea, the structural twin to the USA for feedstock use.
When the US Gulf Coast and China hoover up Atlantic and Middle Eastern straight-run parcels, it tightens the marginal barrel of heavy secondary feedstock globally.
South Korean refiners will have to pay more for their direct residue feeds against the increasingly heavier slate they’re trying to lean towards, driving up Asian gasoline in the process.
Idemitsu will be able to start charging more for their VGO from Japan.
Desks can anticipate shifts in the liquid Singapore Mogas 92 / ICE Brent crack and the US RBOB / Sing 92 transpacific arbitrages.
US Gulf 3.5% HSFO, which meets strict Platts physical waterborne delivery specifications, is sailing West-to-East to clear into the MOC.
Arabian Gulf 3.5% Straight Run Fuel Oil (SRFO) has gone East-to-West into the US Gulf Coast.
That, as discussed, is because it is an uncracked vacuum gasoil barrel masquerading as 3.5% HSFO.
For China, SRFO’s 3.5% HSFO façade is critical, as importing neat Vacuum Gasoil (VGO) carries prohibitive consumption taxes and strict quota blockades.
To circumvent this, the trade resurrects the exact spirit of the historic Bitumen Mixture customs loophole.
The buyer pays for the VGO refining properties while booking the cargo under an HSFO customs code.
This market swell is largely qualitative rather than quantitative.
How much you are being chased by buyers for SRFO is a function of how much they value the underlying properties that will not be stated on your Bill of Lading.
