Libya Propels Sweet African Oil Toward 2011 High: Energy Markets

Africa’s most-traded crude oil is headed for its highest level in two years as disruption from Libya to the North Sea and the Caspian regions forces refiners to seek alternative supplies.

Nigeria’s Qua Iboe, the continent’s benchmark blend, will surpass $4 a barrel more than Dated Brent in the next three months, according to five of seven traders surveyed by Bloomberg. It jumped to a four-month high of $3.58 a barrel more than Dated Brent on Sept. 3, according to the oil-pricing agency Platts, compared with $2.55 as recently as July 26.

Protests at oilfields and terminals in Libya are combining with the lowest loadings of North Sea Forties in 10 months and the weakest supplies from Azerbaijan since 2008 to stoke demand for other sources of similar-quality sweet, or low-sulfur, crude. While boosting revenue for producers from Nigeria, OPEC’s poorest nation, to Angola and Gabon, the higher prices are damping profits at Mediterranean refiners such as Spain’s Repsol SA (REP) and Eni SpA (ENI) of Italy struggling with waning returns.

“A segment of the refining industry is already heavily challenged in terms of profitability,” said David Fyfe, the Geneva-based head of market research and analysis at Gunvor Group Ltd., which bought two European refineries last year. “Those that can will have to source alternative North African and West African crude and maybe look a bit further afield.”

The last time the Qua Iboe premium exceeded $4 was in 2011, when it peaked at $4.35 on Sept. 6 as exports from Libya dried up during the revolution that led to the overthrow of Muammar Qaddafi. That’s 33 cents short of the record achieved in June 2008, data compiled by Bloomberg show.

In last week’s Bloomberg poll of West African crude traders, one said Qua Iboe’s premium over Brent will fail to reach $4 a barrel. Another offered no forecast.

Prompt Premium

The jump in prices comes as the supply squeeze drove up the cost of the earliest deliveries of Brent, against which African crudes are benchmarked. Futures for October settlement has risen 7 percent since the end of July, trading at about $115 a barrel today on the London-based ICE Futures Europe exchange. October deliveries traded on Sept. 3 at $1.90 more than November, the biggest difference since Aug. 15, 2012, when excluding a contract-expiry peak in November.

“Brent has been the beneficiary of this physical tightness,” Fyfe said. “Brent tends to take bigger swings when there are geopolitical uncertainties” compared with New York-traded West Texas Intermediate, he said.

Hurting Refiners

Margins for the most sophisticated refineries using Brent crude in Northwest Europe fell by 66 cents to $4.45 a barrel in July, the International Energy Agency said in its monthly Oil Market Report on Aug. 9. Mediterranean profit slumped by $1.43 to $5.46, the Paris-based organization said.

“These developments both from the supply side of cost of crude and the availability of crudes in the Med, together with the reduced demand, have obviously put a lot of pressure on refining margins in our region,” John Costopoulos, chief executive officer of Hellenic Petroleum SA (ELPE), Greece’s largest refiner, said on an Aug. 29 earnings conference call. Second-quarter margins were the worst in four years, according to the Athens-based company.

Repsol, Exxon Mobil Corp. (XOM) and Eni declined to comment when called by Bloomberg. Massimo Vacca, head of investor relations at Italy’s Saras SpA (SRS), wasn’t available for comment.

Libya, the holder of Africa’s biggest oil reserves, is pumping as little as 13 percent of its post-revolution high achieved a year ago, as strikes and protests sap production, according to state-run National Oil Corp.

No Exports

Output slumped to about 200,000 barrels a day on Aug. 27, compared with 640,000 in August and its optimal capacity of 1.6 million, Nuri Berruien, chairman of NOC, said from Tripoli. Libya isn’t currently exporting any crude and production remains at 200,000 barrels a day, the oil ministry’s director of inspection and measurement, Ibrahim Al Awami, said yesterday.

The loss of supplies from Libya may be mitigated by the end of North Sea field summer maintenance and reduced seasonal demand from European refineries this quarter, Ehsan Ul-Haq, senior market analyst at KBC Energy Economics in Walton-on-Thames, England, said in an Aug. 27 e-mail.

“A further uptick in Nigerian crude differentials is likely to be limited,” he said.

Increased extraction of shale resources in North America is prompting U.S. refiners to cut purchase of African crude, potentially creating a supply cushion against interruptions at other suppliers, according to JBC Energy GmbH, a Vienna-based researcher.

Force Majeure

“The volume of West African crude freed up from the U.S. shale boom is in excess of 700,000 barrels a day, so it would have to be a comparatively large outage to have a strong impact,” Eugene Lindell, a senior crude market analyst at JBC, said by e-mail.

Nigerian crude exports to the U.S. dropped to 337,000 barrels a day in June, down from 1.06 million a day three years ago, U.S. Energy Information Administration data show.

Es Sider, Libya’s largest oil terminal with a capacity of 350,000 barrels a day, has been shut since July 28 because of a sit-in by the Petroleum Facilities Guard. NOC declared force majeure, a legal clause excusing it from meeting its delivery commitments because of events beyond its control, from the port, as well as Ras Lanuf, Zueitina and Brega on Aug. 18. Brega’s restriction was removed Aug. 22.

“If the situation doesn’t improve, the government won’t be able to pay the salaries by the end of the year,” Sliman Qajam, a parliament energy committee member, said Sept. 1 in a phone interview from Tripoli.

Sweet Crude

Sweet crudes are favored by refiners because they yield higher quantities of profitable fuels such as gasoline and diesel than other grades of oil. They contain less sulfur than most Middle Eastern grades, meaning less processing is needed to meet Europe’s clean-fuel standards.

Planned and unplanned maintenance has interrupted low-sulfur crude supply from the North Sea. Shipments of Brent, Forties, Oseberg and Ekofisk, the four grades that comprise Dated Brent, dropped to 735,000 barrels a day in August from 894,000 barrels in May. Forties, the biggest stream of the four, had the most delays in a year when all 11 August cargoes were postponed by several days.

September exports of Azeri Light crude from the port of Ceyhan in Turkey will tumble to the least in almost five years, a loading program obtained by Bloomberg News showed.

Asian Purchases

Increased purchases of West African blends by Asian refiners leave less for European buyers. Asian-bound exports of Nigerian crude for loading in September rose to 415,833 barrels a day, the most since June 2012, according to a survey of eight traders and an analysis of loading plans obtained by Bloomberg News on Aug. 23. Some 84 percent were booked by Indian refineries, whose purchases rose to a 19-month high.

“The expectation up to even a couple of weeks ago was of the Libyan situation might potentially be resolved relatively quickly,” Fyfe said. “Now the feeling is the situation could be longer-lasting.”

The following table shows some of the latest loading program data as compiled by Bloomberg News.

Grade      Month   Volume     Notes
                    (b/d)
BFOE       Aug.    735,484    Lowest since June
Forties    Aug.    212,903    Lowest since Oct. 2012
BTC Azeri  Sept.   551,667    Lowest since Nov. 2008
Kirkuk     Sept.   109,333    Lowest since at least June 2011
Basrah     Sept. 1,762,000    Lowest since at least Jan. 2012

To contact the reporters on this story: Sherry Su in London at lsu23@bloomberg.net; Laura Hurst in London at lhurst3@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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