Unprecedented Forties Loading Delays Inflate Brent Oil Price
North Sea Forties shipments faced unprecedented delays as output from Buzzard halted, pushing the spread between the world’s two biggest benchmark crudes to the widest in a year as traders struggled to meet obligations.
The deferral of 15 out of 16 Forties cargoes in October and at least 60 percent of consignments in November were unheard of, according to a survey of five traders, three of whom have been involved in this crude market for more than 10 years. The delays pushed benchmark Brent crude’s premium over its counterpart West Texas Intermediate to $24.34 a barrel on Oct. 30, the most since Oct. 17, 2011. The front-month Brent futures spread, or backwardation, widened 48 percent in October from a month ago.
“The repeated deferral of a start up of the Buzzard field has sustained the wide premium of Brent over WTI and backwardation in the structure of the Brent curve,” Harry Tchilinguirian, BNP Paribas SA’s head of commodity markets strategy in London, said Nov. 2. “While a $20 plus Brent premium over WTI is ultimately going to dissipate, this will take time given the Forties program for October and November loadings has been heavily delayed.”
Brent, cheaper than WTI for most of the past two decades, reached a record settlement premium of $27.88 a barrel on Oct. 14 last year amid surging U.S. domestic oil production and political tensions in the Middle East. The North Sea blend, which is shipped worldwide, is typically more affected by international events than its U.S. equivalent, which is consumed domestically. The spread between these two futures contracts is the largest traded on exchanges.
Nexen Inc. (NXY) confirmed today that it had restarted the 200,000 barrel-a-day North Sea Buzzard oil field, the biggest contributor to Forties blend, after two-month maintenance.
Brent for December settlement on the ICE Futures Europe exchange fell as much as 92 cents, or 0.9 percent, to $104.76 a barrel today. The European benchmark crude’s premium to WTI, traded on the New York Mercantile Exchange, narrowed to as little as $20.13 following news of the restart and was at $20.64 as of 3:37 London time.
Goldman Sachs Group Inc. said on Oct. 18 the difference will narrow to $4 a barrel early next year before widening to $6 by the end of 2013. BNP Paribas SA, Societe Generale SA and Bank of America Corp. forecast the gap will shrink as North Sea output rebounds.
The field produced about 134,000 barrels yesterday and is scheduled to pump 160,000 barrels today, two traders with knowledge of the matter said, declining to be identified as the information is confidential. Patti Lewis, a Calgary-based company spokeswoman, who earlier wasn’t available for comment, confirmed the resumption and the planned crude flow rate.
Its resumption was delayed several times from the planned mid-October start, leading to a series of cargo deferrals and one dropped lot in the Forties loading program. The blend is the most abundant of the four crudes that make up the Dated Brent benchmark and, as the cheapest of the four, typically sets the marker used to price more than half of the world’s oil.
Delays to the Buzzard restart also contributed to a bigger backwardation, or spread between the front-months, in Brent market. Backwardation denotes a market in which oil for nearer delivery trades at higher prices than later-dated contracts, potentially indicating concern about supply or rising demand.
Buzzard has been “massively supportive for the Brent market itself, but more of this is reflected in the time spread,” Torbjoern Kjus, a senior oil analyst at DNB ASA (DNB) in Oslo, said by phone on Nov. 2. “Brent backwardation has been very strong because of this.”
The front-month Brent futures averaged 95 cents a barrel more expensive than the second month last month, compared with 64 cents a month earlier .
Of the Forties shipments planned for loading in October, cargo F1016 was faced the longest delay, deferred by 34 days to December, according to revised loading programs. Of the 14 consignments for November, one was dropped and at least nine were postponed, the plans showed.
Forties exports for November are planned at 320,000 barrels a day, up from a five-year low of 160,000 barrels in September, and about 30 percent less than a year earlier, according to loading programs.
Cargo deferrals have caused a series of operational issues, according to the survey. For owners of the crude, any delays in a backwardated market mean they lose money, while for shipping companies and buyers, they will have to renegotiate loading or delivery dates, find other grades to meet refining needs, said traders in the survey.
“With the closure of field, buyers had to turn to alternative crude of similar quality, and likely leading to a strengthening of the differentials of these crudes relative to Brent,” Tchilinguirian said.
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