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Forties supplies to Asia reach record highs in 1H

15 Jun 2016 16:20 (+01:00 GMT)
Forties supplies to Asia reach record highs in 1H

London, 15 June (Argus) — Exports of North Sea Forties crude to Asia-Pacific are on course to reach record highs in the first half of the year, as shipments to both China and South Korea continue to grow.

Asia-Pacific buyers are expected to account for 165,000 b/d, or 39pc, of Forties crude loadings between January and June. This compares with 140,000 b/d — or 35pc — in the first half of 2015, and 90,000 b/d — or 24pc of Forties loadings — in the first six months of 2014.

South Korea took more Forties than any country except for the UK last year, accounting for more than a quarter of the grade's loadings. And the flow of crude to the country has continued in the first half of this year. South Korean buyers are expected to take around 65,000 b/d — or around 15pc —of the 420,000 b/d of Forties crude loaded in the first half of this year. Yet this is less than half of the Forties crude that has made the voyage east in 2016.

Chinese buying of Forties crude has overtaken that of South Korea this year, for the first time in recent memory. China is set to take 77,000 b/d of the Forties blend in the first half of the year — or 18pc of all Forties crude loadings — more than double the 30,000 b/d taken by Chinese buyers in the first six months of 2015.

Strong growth in Chinese crude demand has been a driver. Net crude imports to the country reached a record high of more than 8mn b/d in February, up by around 20pc compared with a year earlier.

Much of this year's growth in Chinese crude imports has been driven by China's so-called teakettle refiners. Teakettles imported 640,000 b/d of crude in February this year, a record high for the sector. Refiners have also been adjusting their crude import mix, loading less Russian light sweet ESPO Blend and taking more Forties and west African cargoes as a result.

China's teakettles — to which the government began issuing quotas to refine imported crude in July last year — have been ramping up purchases recently amid fears the government may cut import allowances in August this year, when they come up for renewal. Teakettles pledged to shut outdated crude units, upgrade fuel quality and build gas storage tanks in exchange for rights to import crude — but many have not done so — and this has caused some frustration in the Chinese government. So, teakettles under threat of licence cancellation seem to be maximising crude runs now, while they still can.

Several investments are also set to be made in the teakettle sector — including new crude pipelines and storage tanks — raising the possibility that teakettle crude demand will continue to rise.

Regardless of the reasons, the eastward flow of Forties crude looks to be something of a permanent feature, as shipments to the region have grown in 2016 despite there being less economic incentive to do so.

Mideast Gulf crudes such as Abu Dhabi light sour Murban have looked more appealing to Asia-Pacific buyers this year than Forties. Forties has been trading at an average discount to Murban of $1.25/bl this year, compared with a discount of $2.04/bl during the first six months of last year.

The Brent-Dubai EFS — the key price spread between Ice Brent futures and Dubai crude swaps that governs west-to-east trade — has also been persistently high in 2016 to date, which would be expected to make crudes from the Mideast Gulf much more attractive to Asian refiners than Forties. So far this year the spread has averaged $3.31/bl, almost twice as wide as the $1.74/bl average over the first six months of last year.

Unipec, Shell, and Vitol have been responsible for much of the flow of Forties crude east so far this year. In May, 195,000 b/d of Forties crude went to Asia-Pacific, with at least 130,000 b/d sent by Shell aboard two VLCCs, the Samco Sundarbans — which is scheduled to arrive in China on 26 June — and the Miltiadis Junior — which is scheduled to arrive in Singapore on 2 July. But Singapore is rarely the final destination for Forties crude, which usually continues onwards to China or South Korea.

In April — when Asian buyers would have been looking to buy May-loading Forties crude — Forties averaged a $1.58/bl discount to Murban, providing economic incentive for the eastward flow. But in May — when Asian buyers would have been looking to buy June-loading Forties — the discount had narrowed to an average of just 20¢/bl, with the grade at a premium to Murban for more than half of the month. Yet Shell is on track to send a further 200,000 b/d of Forties crude to Asia aboard three tankers in June — more than half of the 360,000 b/d of Forties scheduled to load that month.

The 2mn bl Athina departed for South Korea on 6 June, the similarly-sized Sara has now arrived in the Hound Point area and is scheduled to sail east with its Forties cargo on 20 June, and the Samco Europe has been provisionally fixed to take Forties to South Korea on 22 June.

The Forties crude aboard the Athina appeared to be unsold at the time of departure, as the vessel showed "for orders" when signalling its destination of Yeosu, South Korea. As such, Shell will likely be looking for buyers over the coming weeks while the cargo is on the water. But as oil firms compete to secure market share in Asia-Pacifc, it seems shipments of North Sea crude eastwards will continue regardless of the arbitrage economics or the ebbs and flows of Asian crude demand.