An increase in export volumes for March has weighed on premiums paid for Australian heavy sweet crudes to date this month and the downside correction could continue amid growing competition from Brazilian arbitrage supplies, Asian traders said Thursday.
S&P Global Platts assessed Vincent crude at a premium of $2.60/b to Platts Dated Brent crude assessments on an FOB basis Wednesday, the lowest differential since December 15 last year, when it commanded a $2.55/b premium.
Trade sources said Quadrant Energy and BHP Billiton could have each sold a 550,000-barrel cargo of Pyrenees crude for loading in March at a premium in the range of $3.10-$3.40/b to Platts Dated Brent crude assessments, weaker than the premium of around $4/b heard paid for a February-loading cargo in the previous trading cycle. "It's double the export volume [for Australian heavy sweet Pyrenees crude in March from February] so it's natural to see the premium slide," said a North Asian sweet crude trader.
Indications of heavy sweet crudes to be exported from Australia in March reflected a much bigger program, with Pyrenees seeing a 100% increase in exports from the month before.
There are no Vincent crude cargoes available for loading in February, but Woodside Petroleum holds one 550,000-barrel cargo for loading over March 7-11.
The March Vincent cargo was recently sold to an Asian customer at about 30 cents/b below the latest March Pyrenees value, a source with direct knowledge of the sales told Platts Thursday.
"Quite often we achieve numbers pretty similar to Pyrenees," the source added.
However, some North Asian crude traders said the Vincent cargo was likely sold at around Dated Brent plus $2.50/b, putting it roughly 60-90 cents/b below the premiums heard paid for March Pyrenees cargoes.
Regional sweet crude traders said price differentials for Australian heavy sweet grades could extend losses in the near to medium term amid growing concern that China's state-run and independent refiners, the major customers of Pyrenees and Vincent, could shift focus elsewhere for cheaper supplies.
One Singapore-based sweet crude trader said Australian crude producers could surrender some market share in China to South American suppliers, with latest data showing a growing number of Brazilian crude exports to the world's biggest energy consumer.
"It's not like Australia is the only place for China to acquire heavy low sulfur crudes... of course they can look elsewhere like South America," the Singapore-based trader said.
COMPETITION FROM BRAZIL
December 2016 saw a dramatic increase in Brazilian crude imports to 1.05 million mt, more than doubling from 529,000 mt the month before, Platts data showed.
January shipping fixtures seen by Platts indicated that Petrobras has fixed the New Vanguard, Cosglory Lake, GC Fuzhou and Saham to move a combined 1.06 million mt of crude oil for January loading from Brazil to the Far East and India.
Petrobras has also fixed the Maran Cassiopeia to move 130,000 mt of crude for February 2 loading from Brazil to the Far East, according to the latest February shipping fixtures.
"[Brazilian crudes that Chinese have bought for Q1 delivery are also] sweet and heavy [but they are] cheaper than the similar grades produced in the Far East and West Africa," a trader with knowledge of China's recent purchases from South America said.
The influx of Brazilian crude supplies into Asia is expected to continue throughout the first quarter as WTI continues to weaken relative to Brent and Dubai, making WTI-based crudes more price competitive than those linked to the Middle Eastern and European benchmarks, market participants said.
The front-month swap spread between Dubai crude and WTI has narrowed significantly over the past month or so, with the February Middle East crude benchmark swap at one stage commanding a premium over its US counterpart early in the month.
In addition, the front-month Brent-WTI swaps spread in Houston has averaged $2.49/b so far this month, compared with an average of $2.41/b in December and $1.53/b in November.
The trader with knowledge of the recent Brazilian supply deals declined to confirm the exact crude grades purchased from Petrobras, but market sources said the cargoes could be Marlim, Roncador and Lulu crude.
Marlim has a gravity of 19.2 API and 0.78% sulfur, while Roncador Heavy has a gravity of 18 API and 0.688% sulfur. Petrobras also exports Lula with 29.3 API and 0.35% sulfur.
Australia's Vincent is a heavy sweet crude with a gravity of around 17.4 API and sulfur content of 0.37%. Pyrenees has a gravity of 19.3 API with 0.19% sulfur, according to the grade's assay report dated September 16, 2011.
