Seatrade Maritime is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Middle East, Asia-Pacific crude oil to struggle through March

Middle East, Asia-Pacific crude oil to struggle through March

Dubai: Middle East and Asia-Pacific crude could be saddled by record-deep discounts at least through March as fuel and petrochemical demand shrinks with the looming global recession, getting little help from OPEC's output cuts, Reuters reported over the weekend. Major Asian buyers China, Japan and South Korea have either trimmed oil imports or cut refining rates, sending grades ranging from Qatar's heavy sour Al Shaheen to Vietnam's light sweet Ruby crude stumbling over the past two months.

And the record discount levels traded could be repeated through the first quarter and beyond, traders and analysts said. Global crude oil benchmarks have sunk nearly $100 a barrel from their July peaks to $50, around the weakest in 3 years. Low outright prices would normally help boost demand and price differentials of crude traded on the spot market.

But differentials for Middle East and Asia-Pacific crudes -- premiums or discounts to benchmark prices -- have for the most part turned negative for cargoes loading this quarter. They could worsen as Japan dips into its first recession in seven years, Korea is predicted to follow next year and China's growth slowed. "Demand looks bad, especially for light sweet crudes, which are related to the naphtha market. Naphtha relates to the petrochemical industry and petrochemicals relate to the economy," a trader with a refiner said.

"Now the world is heading to a recession and it is not likely to recover soon." Refiners have bargained for discounts, as profit margins for processing crude into products have been declining, with the diesel crack more than halved from a record premium of $45 a barrel to the Dubai crude benchmark in May.

Worse, margins for cracking naphtha into petrochemical products slid into the red last month and have stayed negative. This has also hit demand for naphtha-rich grades such as Australian Cossack and condensate, which is a super light crude.

The downturn has forced some refiners and petrochemical makers to operate at lower rates, such as South Korea's YNCC, which has halved its cracker production. Japanese refineries are running at an average 4.5 percent lower than a year ago, and China's top refiners are running 5.0 percent less crude this month than in October. South Korea's crude stocks fell to their lowest in over four years by end-October, as refiners chose not to fill up their tanks on a poor demand forecast.

Last week, consumer watchdog International Energy Agency (IEA) slashed its global oil demand forecast for next year to a small rise of 350,000 barrels per day (b/d), from an 890,000 b/d growth in its prediction two months ago. This followed weaker economic forecasts by the International Monetary Fund, which said developed economies are headed for the first full-year contraction since the Second World War.

"In the next year or two, condensate will remain weak. Even in a good market, condensate would have suffered," said Al Troner, managing director of Asia Pacific Energy Consulting, which published a study: "Condensate East of Suez 2008: NGL's growing impact on the petrochemical and transport fuel markets." "But in this market, with naphtha where it is, the question is how far do you think this could go?" A by-product of gas developments, condensate supplies will rise as more liquefied natural gas (LNG) projects come upstream over the next few years, adding further pressure, Troner said.

The slump has forced sellers to look to faraway destinations, with up to 3.6 million barrels of Australian condensate heading to the United States and Brazil loading in November and December. And buyers of sour Qatari condensates have declined to commit for 2009 term volumes so far.

The move by the Organisation of the Petroleum Exporting Countries to lower output by 1.5 million barrels per day from November 1 has led to cuts in Middle East crude term supplies to Asia, prompting some refiners to turn to the spot market.

Spot Murban crude recovered to parity level to its ADNOC marker price late last month after Abu Dhabi National Oil Co decided to cut term supplies of the flagship grade by 15 percent from December, together with smaller cuts in other grades.

Saudi Arabia's 5 percent cut in term supplies to Asia in December also lent some support to rival heavy sour Qatari Al Shaheen crude, which improved from record-low discounts of $3.90 a barrel to Dubai quotes to minus $3.40-3.60. But the upside is limited. "When the market is in oversupply, as it is now, differentials fall. They will correct themselves but over the next three months they could continue going down," said John Vautrain from energy consultancy Purvin and Gertz.

"OPEC cuts have not managed so far to halt the slide in prices." Asia-Pacific crudes, which are high-quality, low-sulphur grades and do not vie with nor supplement most OPEC grades, have shown little sign of recovery so far. Additional supplies coming on stream in Vietnam have further dampened the market. Vietnam agreed to sell term volumes of medium light, Su Tu Den crude for first-half 2009 at a discount of $2.20 a barrel to Minas quotes, the lowest on record, as weak demand compounded a doubling in the crude's output with the startup of the Su Tu Vang oilfield last month.

Sellers of regional crude pin some hopes on a recovery in diesel, with most grades having a high yield of middle and light distillates, ahead of the festive season in January. But naphtha is not expected to rebound for at least six months. "I still see strength in middle distillate-rich crudes such as Tapis-related regionals... They simply have value and I believe they will recover," a seller said, referring to the high-value Malaysian benchmark crude.  [24/11/08]





Hide comments
account-default-image

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish