China's faltering demand for heavy sweet crude produced in Asia and Oceania, coupled with the narrow WTI/Brent spread could prompt some of the Australian crude suppliers to shift their focus to outlets in North America, market participants said Tuesday.
Regional traders noted that the recent sharp downtrend in regional fuel oil margins as well as China's latest crackdown on energy import and consumption tax avoidance would likely keep many Chinese buyers at bay.
"Fuel oil cracks are looking very poor and [China's] domestic margins are in a bad shape," a North Asian sweet crude trader said.
China has traditionally been the main outlet for most of the Australian heavy sweet crudes like Enfield, Vincent and Pyrenees. However, traders said the suppliers have been venturing outside of the region in recent weeks, with end-users in the US West Coast and Gulf Coast lending a helping hand.
Earlier in the month, market talk had indicated that Woodside Petroleum and Mitsui could have placed a 550,000-barrel cargo each of heavy sweet Vincent crude for loading in June to US buyers.
According to the latest shipping fixtures seen by Platts, Valero fixed Kyeema Spirit to move 100,000 mt of crude for June 5 loading from Western Australia's North West Cape to the US Gulf Coast. Regional traders said the fixture does not come as a big surprise as the US market has often served as the second or third choice outlet for Australian crude suppliers.
"If the Chinese don't bid, Australian [heavy sweet crudes] will struggle, it's as simple as that," said another North Asian crude trader. GROWING US INTEREST AMID OUTPUT DISRUPTIONS IN NORTH AMERICA
The July trading cycle for Australian light and heavy sweet crudes failed to get off to a positive start, with latest market talk indicating that BHP Billiton could have placed a cargo of Pyrenees crude for loading in July at a premium of about 40 cents/b to Dated Brent, weaker than premiums of $0.50-$1/b paid for June-loading cargoes.
Meanwhile, trade sources said Woodside Petroleum has so far failed to place its cargo of Enfield crude and Mitsui is still in search of a buyer to take its Vincent crude cargo for loading in July.
It wasn't all doom and gloom however, regional traders said, indicating that US end-users have been tapping on Australian suppliers' shoulders due to the ongoing production hiccups in North America triggered by wildfires in Canada.
"It's highly possible that [July loading] Vincent crude could move to US again ... supply disruptions in Canada mean end-users [in North America] would have to search for alternatives, likely West African and/or Australian crudes," said a Singapore-based crude trader.
It has been about three weeks since wildfires broke out in the heart of Alberta's oil sands production area in the Athabasca region in Fort McMurray, and it is still raging.
The oil industry did not fare so well as in a span of just three days, as oil sands producers responded by either curtailing output or completely shutting production totaling roughly 1.03 million b/d.
Syncrude Canada last week issued a force majeure declaration on some May supplies in the wake of weeks of wildfires across northern Alberta, Canadian crude traders said.
Syncrude Canada operates the Aurora and Mildred Lake bitumen mines and an adjacent 296,000 b/d upgrader that converts bitumen to synthetic crude.
The company's production capacity is 350,000 b/d of upgraded bitumen or synthetic crude, but it has reduced that by an unspecified amount.
NARROWING WTI/BRENT DRAWS US END-USER INTEREST
Traders also pointed out that WTI's narrowing discount against Brent crude also bodes well for US buyers seeking arbitrage crude cargoes outside the Americas.
The front-month WTI/Brent futures spread was at minus 40 cents/b at 0830 GMT, close of trade in Singapore Monday, but had fallen to as low as minus $2.48/b on February 29. The discount was much wider during 2015, touching minus $12.86/b on March 2 last year.
A stronger WTI value versus Brent typically makes Brent-based crudes more competitive against WTI-based crudes.
"Some of the Australian heavy [sweet crudes] are trading in discounts [to Dated Brent] and that's going to help [boost US end-users' buying interest] further," said the Singapore-based trader.
In the previous trading cycle, Inpex was said to have sold a 400,000-barrel cargo of Van Gogh crude to a western trading house at a discount of around 80 cents/b to Dated Brent, while Woodside could have sold the June-loading Vincent crude to Valero at a discount of around 40 cents/b on a FOB basis, trade sources said.
