Buying of Atlantic Basin crudes by Asian buyers -- particularly in China -- has spiked since the beginning of 2017 on a confluence of factors that include the OPEC production cuts and subsequent narrowing of the Brent/Dubai Exchange of Futures for Swaps, lower freight rates and strong refining margins.
The front-month Brent/Dubai EFS -- which shows the relative value of Dubai crudes versus Brent -- has been stuck below $2/b so far this year, averaging $1.59/b, around 30% lower than the Q4 2016 average, according to S&P Global Platts data.
A narrow EFS makes Brent-related grades attractive to the Asian market.
The Dubai market has risen over the past couple of months in the wake of the OPEC cuts announced in late 2016, which has constrained volumes of sour crudes on the market, pushing up prices for Middle Eastern sour barrels and encouraging Asian refineries to look for alternative barrels, such as Russian Urals, North Sea Forties and Angola's sweet but heavy crude grades.
At the same time, trading and refining sources say that cracking margins are healthy throughout Asia meaning refineries across the region are likely to be operating at maximum run rates in the near future. "I think [Asia's buying demand] is due to the combined factors -- freight is cheap, gasoline margins are up due to high demand and cracks look very healthy. Plus the Brent/Dubai EFS is also a big factor," said a crude trader.
NORTH SEA ARB TO ASIA ATTRACTIVE
The narrow Brent-Dubai EFS has significantly increased the attractiveness of Forties crude to Far Eastern refiners in 2017, with huge quantities of the North Sea's medium sweet grade fixed to move to Asia in the first two months of the year.
According to data from Platts trade flow software cFlow and trading sources, six VLCCs have already loaded Forties at Hound Point in January and February, with two further VLCCs -- the Bunga Kasturi Lima and Trikwong Venture -- expected to load in the next two weeks.
In addition to this the Sandra is currently performing a ship-to-ship transfer of Forties crude from the New Success VLCC at Southwold and is due to begin steaming towards South Korea in the coming days. This means than a total of nine VLCCs of Forties crude are likely to head to the Far East in January and February.
Whether such heavy flows will continue is uncertain, with few reports of ships being fixed for March despite the persistently narrow Brent-Dubai EFS. "Looking at the fundamentals the Brent/Dubai is narrow enough and freight isn't too bad, with it probably now below $5 million for a VLCC [for Hound Point-Far East]. But the question is, what is the cheapest alternative for the Chinese?" a trader said.
Among the other alternatives for Chinese and other Far Eastern refiners are Urals and CPC Blend, with the former heard to be heading East in large quantities in February.
The arbitrage from the North Sea to the East is looking more attractive as lumpsum prices to take VLCC have also dropped. The Hound Point-Far East VLCC route, basis 270,000 mt, was assessed at $5.8 million lumpsum on January 13, but this level had dropped to $5 million by February 15, according to Platts data.
SHIPPING RATES ADVANTAGEOUS FOR WAF, INCREASED TEAPOT DEMAND
The West African crude markets have also seen significant upticks in the buying demand, mainly from China but also from refineries in India, Taiwan and Thailand at the start of 2017. The bulk of West African crude exports loading in February and March are headed to Asia, with limited volumes seen going to Europe and the Americas, according to trading sources.
"If we take January, February and March the average volume going eastwards is 2.2-2.3 million b/d [from] across West Africa. This is compared to 2.1 million b/d in 2016," said one WAF crude trader.
He added: "The Chinese have taken quite a bit more in Q1, which I think has to do with the teapots [independent refiners], but also the Indians have been taking a bit more, a bit more to Thailand, which we hadn't seen recently, while Taiwan has been stable. There is more [WAF] going to Asia than there was at this time last year."
The trend has been most pronounced in Angola, with Platts data showing three-quarters of the March-loading program scheduled for Asian destinations, up from the 62% in March 2016. In the February Angolan loading program, 83% was scheduled for Asian destinations, versus just over half in February 2016.
Other heavy crudes from the region have also seen increased buying from Asia, including Congolese grade Djeno and Chad's heavy Doba crude.
One aspect of the demand has also come from China's independent teapot refineries, which have continued to ramp up their appetite for international crudes since they received government permission to import crude at the beginning of 2016.
The teapots have proved to be a lucrative outlet for Angolan sellers, according to market sources, with many willing to pay higher prices to obtain the heavy but sweet Angolan crudes that are a better match for their refineries than other regional crudes.
As a result, major Angolan buyers such as Unipec, Sinochem and trading houses have been buying more Angolan crude to re-sell to teapot refineries, said traders. "A lot of the buying in March has been mostly based on expectation of demand from teapot refineries," said a second WAF crude trader.
The VLCC and Suezmax routes from West Africa to China were soft through January, with VLCCs seeing lower rates due to weak demand in the leading VLCC market in the Persian Gulf, which pushed down Atlantic rates too, sources said. In the last month the VLCC route from West Africa to China, basis 260,000 mt, was assessed at a high of $18.20/mt on January 13, and dropped as low as $15.40/mt on February 2, a 15% decrease.
Suezmax rates have also softened in the last month, in large part due to strong demand for VLCCs taking out a lot of February-dated Suezmax cargoes, sources said. The Suezmax route from West Africa to China, basis 130,000 mt, was valued at $27.57/mt on January 13, but this route dropped as low as $17.77/mt on February 3, a 35% decrease, according to Platts data.
RUSSIA'S URALS INCREASES ARB FLOWS
Equity holders of crude oil loading from the Mediterranean, Black Sea and the Baltics have also been using the narrow EFS to sell some of their wares into Asia.
Urals loading in Northwest Europe as well as the Mediterranean has been sold to Asia in recent weeks. Two VLCCs have found homes in Asia in February, according to trading sources -- Unipec's VLCC the BW Utik, from Skaw in Denmark to Asia loading on an STS basis on February 14-17.
The second is the Front Page, chartered by Trafigura, for which loading ports are not yet confirmed.
"There are two likely options for the Front Page, one is that it only loads Urals at Skaw and the other is that it will be a co-load with Forties from Hound Point and Urals from Skaw," a trading source said.
However, a ship broker said that is more likely to be just a Urals cargo going East with another trader saying that "double port charges and STS would severely harm the economics of the trade."
For Urals loading at the Black Sea port of Novorossiisk, sources said there were four Suezmax vessels heading to Asia in February, which had in particular helped differentials appreciate at the beginning of the month.
Additionally, one trading source said that "bids from Asian buyers for Med Urals have been coming in at around Dated Brent minus $2.00/b for CFR Augusta, which is a level you can certainly work with if you are the seller."
On top of that, around 5 million barrels of Azeri Light have been sent to the East, with the majority being sold by Socar.
Apart from a narrow EFS, the vast amount of sweet grades available in the Mediterranean has led to sellers looking for alternative homes for their cargoes and Asia emerged as a willing buyer that also helped to strengthen differentials for the grade.
