Asia crude buyers turn to Russia, US
The Forties pipeline system will close for several weeks while its operator, INEOS, repairs a crack in a pipe discovered last week. Forties crude is one of the several oil grades that sets the price of Brent. The Forties pipeline system opened in 1975 to transport crude from the U.K.'s first major offshore oil field. Today, the Forties Pipeline System transports about 40 percent of the U.K.'s North Sea output from more than 80 fields.
As S&P Global Platts writes in an article "Asia crude buyers turn to Russia, US on Forties shutdown", the closure of the North Sea Forties pipeline late Monday and a corresponding spike in the Brent-Dubai spread could prompt Asian sweet crude buyers to shift focus to Far East Russian and North American supplies as many light sweet oils priced against the European benchmark rapidly lose appeal to low sulfur grades linked to other global benchmarks including Dubai and WTI.
The Brent/Dubai Exchange of Futures for Swaps - a key indicator of Brent's premium to the Middle Eastern benchmark that often serves as a barometer of general strength in the European crude complex - was assessed at $3.73/b Tuesday in Singapore, a jump of more than 70 cents/b from $3.02/b on Monday, and the highest level since $3.76/b on June 7, 2016.
Regional sweet crude traders noted that the latest benchmark price development would work heavily in favor of suppliers of Dubai-linked sweet crude grades, such as Far East Russian Sokol, Sakhalin Blend and ESPO Blend. "All Dubai [-linked grades] should be supportive, especially ESPO Blend and Sokol," said one Southeast Asian sweet crude trader.
In contrast, most regional crude grades are priced against Platts Dated Brent assessments and are less likely to be favored as Brent futures contracts command a more than $3/b premium to Dubai swaps following the pipeline closure. "If you ask me whether I would rather buy Dubai-linked crudes than Dated Brent or ICE Brent-linked, I will buy Dubai-linked," said a Singapore-based crude trader.
The EFS spread widened in Asia as the Brent crude benchmark rallied late Monday in London after a spokesman for Forties pipeline operator Ineos said the shutdown is likely to last for weeks, implying a significant hit to global crude supplies.
The Forties pipeline, the UK's largest crude oil supply artery, was closed in late European trade Monday for a "controlled shutdown" after a crack discovered late last week was found to have widened, the pipeline's operator Ineos said.
Focus on Far East Russian grades
Spot differentials for Far East Russian grades could outperform in the Asia Pacific sweet crude complex in the coming weeks as Asian refiners show preference for cheaper Dubai-linked feedstocks, while spot supply for loading in February appears tight, market participants said.
Light sweet Sokol crude will likely be closely monitored by many potential Northeast Asian buyers as the February loading program obtained by S&P Global Platts showed 11 cargoes of the Far East Russian grade being allocated, less than the 12-13 cargoes seen offered in the January program.
Indian upstream player ONGC Videsh recently emerged with its monthly tender, offering 700,000 barrels of Sokol crude for loading over February 9-15. "That's the next step to watch - I think Sokol [premiums] will jump," the Southeast Asian trader said.
Medium sweet ESPO Blend could also receive plenty of support amid the fast-growing popularity of low sulfur grades priced against Dubai, traders said.
"The beauty of [Far East] Russian sweet grades is that they are the rare Dubai-linked oils offered in the regional market," said a trader at a South Korean refining company.
Four Northeast Asian traders surveyed by Platts said they expect ESPO Blend for loading in February to receive premiums of around $3.50-$4.50/b to Platts Dubai later this month. In comparison, premiums for late-January ESPO cargoes were heard to have changed hands at premiums of around $3.85/b to Platts Dubai.
Demand for light sweet US crude could also pick up sharply as some South Korean and Chinese refining companies seek alternatives to North Sea and Mediterranean grades.
South Korean refining companies combined have been purchasing at least 2 million-3 million barrels/month of North Sea crude to date this year, but the companies could opt to completely replace European supply with light sweet grades from the US, at least for the next few months, said a trading manager based in Seoul. "The Brent-WTI premium spiked so there's little price merit [for North Sea arbitrage deals]," the trader added.
Apart from the widening Brent-Dubai EFS spread, the latest North Sea development also led to the ICE Brent/WTI spread widening to settle at $6.64/b Monday from less than $5/b on November 4. The spread stood at $6.98/b as of 0830 GMT Tuesday.
A weaker WTI versus Brent and Dubai typically makes North and Central American crude grades priced against the US benchmark more competitive. "I suspect Asian refiners could ramp up US crude purchases because WTI pricing remains very attractive," said a sweet crude trader based in Beijing.
Since the beginning of fourth quarter, Asian refiners have been searching for affordable North American crude supplies for processing in winter, and at least four VLCC vessels carrying WTI Midland, Eagle Ford crude and condensate for lifting in November will make the journey to the East, three market sources familiar with the matter told Platts.
In addition, regional sweet crude traders noted Indian refiners that typically buy large volumes of Brent-linked West African grades could also shift their focus to light sweet US crude, at least in the near term.
Earlier this month, India's state-owned Mangalore Refinery and Petrochemicals Ltd. struck its maiden deal for US crude by contracting 1 million barrels of the high sulfur Southern Green Canyon grade for delivery over February 1-10. MRPL joined the league of state-owned refiners such as Indian Oil Corp. and Hindustan Petroleum Corp. Ltd. that have bought US crude since July.