More North Sea oil is being shipped to Asia than at any time in the past eight years as prices fall to the lowest levels in 15 months compared with Middle East alternatives.
Brent traded at $2.41 a barrel more than Dubai crude on Jan. 13, the smallest difference since October 2010, PVM Oil Associates Ltd. data show. Companies led by BP Plc and Vitol Group have sent at least 8 million barrels of North Sea oil to Asian ports since mid-December, equivalent to six days of U.K. production, according to ship-tracking data from AISLive Ltd. That’s the most for any month since 2004, data from Galbraith’s Ltd., a London-based shipbroker, show.
Rising production in Libya, refinery closures from the U.K. to Switzerland and a drop in U.S. gasoline demand have created a surplus that is weighing on the price of low-sulfur, or sweet, crude produced in the North Sea and West Africa. That is making it profitable for companies to transport the raw material more than 16,000 miles (25,700 kilometers) to Asia, where demand is outpacing the rest of the world.
“There’s a glut of light-sweet crude,” said Leo Drollas, chief economist at the Centre for Global Energy Studies, the London-based researcher founded by former Saudi Arabia Oil Minister Sheikh Ahmad Yamani. “It’s a demand-and-supply story. The return of Libya is part of it. Then there’s weak demand for gasoline in the U.S. It’s negative.”
While still more expensive than Middle East grades, Brent’s narrowing premium is making it more attractive to Asian refiners because it’s cheaper and easier to process into higher-value products such as gasoline and diesel, according to JBC Energy GmbH, a Vienna-based consultant.
The Brent-Dubai spread, a measure of North Sea prices versus crudes typically sold in Asia, was at $2.75 today, compared with an average of $5.15 in the past year, according to PVM, which tracks Brent on the ICE Futures Europe exchange and Dubai swaps in the brokered market.
The spread has narrowed as the crude grades that comprise Dated Brent have fallen. The price of Forties dropped to 63 cents a barrel less than Dated Brent on Jan. 17, the lowest level since Oct. 24, 2010, according to data compiled by Bloomberg. It was at a premium of 18 cents today, compared with an average of 37 cents more than the benchmark grade in the past 12 months. The premium of Nigeria’s Qua Iboe oil declined to a one-month low of $2.50 a barrel relative to Dated Brent on Jan. 20, the data show.
“North Sea Forties, the usual price-setter of Dated Brent, seems to be increasingly becoming an arbitrage crude,” analysts led by Johannes Benigni at JBC Energy wrote in a Jan. 31 report. “Substantial volumes have been sent to Asia over the last three months, with China, South Korea and Australia accounting for the bulk.”
Loadings of North Sea Forties crude will swell to a 10-month high of 475,862 barrels a day this month, while shipments of Nigerian supplies will rise by 1.8 percent from January to 2.14 million barrels a day, loading programs obtained by Bloomberg News show.
BP, Europe’s second-biggest oil company by market value, and Vitol, the world’s biggest independent oil trader, scheduled supertankers from Hound Point, a terminal off the coast of Scotland, to South Korea and Singapore, on Dec. 12 and Jan. 15, respectively, according to Athens-based Optima Shipbrokers Ltd. Two more vessels were hired to load in mid-January, according to AISLive, a unit of Redhill, England-based IHS Fairplay. Officials at BP and Vitol declined to comment on oil shipments.
“This is really a push from the west,” said Olivier Jakob, managing director at Petromatrix GmbH, an oil-market researcher in Zug, Switzerland. “With the return of Libya and the closure of refineries in the U.S. and Europe, the Atlantic Basin has to push some barrels out, and this is seen through the weaker Brent-Dubai spread.”
Brent, the benchmark grade for more than half the world’s oil, will start to reverse its decline against Dubai swaps as suppliers of sweet crude such as Angola and Nigeria struggle to bolster capacity, while OPEC members increase output of medium and heavy crude, curbing the advantage of shipping oil to Asia from Europe and Africa, according to BNP Paribas SA.
“Going long Brent, short Dubai appears to us an attractive medium-term trade,” Harry Tchilinguirian, the London-based head of commodity-market strategy at BNP Paribas, said in a Jan. 19 telephone interview.
Refiners are shutting plants amid a slide in gasoline use in the U.S., the world’s biggest consumer of the motor fuel. Demand dropped to a seven-year low in the week ended Jan. 6, according to MasterCard Inc.
Petroplus Holdings AG, the European refiner that filed for insolvency last month, said in December it’s closing three plants with a combined capacity of 337,000 barrels a day. That’s about 2 percent of Europe’s capacity, according to data compiled by Bloomberg. Total SA, Europe’s largest refiner, reduced its capacity in Europe by 19 percent in the five years to 2010, according to data posted on its website.
Libya’s crude production rose to 1.3 million barrels a day as of Jan. 25, state-run National Oil Corp. said Jan. 26. Output from the North African nation slumped during last year’s uprising to oust Muammar Qaddafi, from about 1.6 million barrels before the conflict began.
The return of Libyan crude production is “weighing heavily on differentials for European sweet crudes,” JBC Energy said in a Jan. 17 report.
Asia Versus Europe
Es Sider crude, Libya’s benchmark export grade, is also light and sweet, like most West African and North Sea oil. It has a sulfur content of 0.4 percent, similar to the 0.56 percent of Forties, according to Bloomberg data and London-based BP, which operates the Forties pipeline.
About 2.15 million barrels a day of West African crude will also be shipped to Asia during February, the most in at least seven months, according to loading programs and a survey of six traders by Bloomberg News. That’s equivalent to the entire output of Nigeria, Africa’s largest oil producer.
China’s oil demand will increase by 4.3 percent this year to 9.9 million barrels a day, while consumption in other developing nations in Asia will rise 3.8 percent to 11 million, according to the International Energy Agency. Oil use in Europe will contract by 1.4 percent to 14.1 million barrels, the Paris-based energy adviser said.