The Crude Report: WAF demand revival

Author Argus

West African crude is seeing a demand revival from its key market in China and also, to a lesser extent, from some more unexpected sources.

Transcript

James Gooder: Hello and welcome to The Crude Report. This is a podcast series from Argus on global crude oil markets.

My name is James Gooder - I'm the VP for crude at Argus Media in London. And this week my guest is Nicola De Sanctis. He's one of our crude market experts and he's the editor of the Argus West Africa Oil report.

This week, we're taking a closer look at west Africa (WAF), it's a region close to both of our hearts and important swing area for oil production to find its way into markets around the world. So we're gonna have a look at the changing picture for the crude exports based in west Africa and the markets around the world that are buying that crude. Nicola, welcome to the podcast.

Nicola De Sanctis: Hey, James, thanks for having me back on the podcast. Can't wait to talk about WAF.

James: Well, it's good to have you back. One of the stories that we've been hearing and propagating in recent months is that demand for west African crude is being threatened in every market by US exports. Is that really the case, though? What has the real impact been?

Nicola: Well, tricky question. I believe the perfect answer to that would be yes and no. So obviously we've seen WTI displacing west African crude since at least mid-2019, give or take. But things, I believe, are slowly changing, at least in some key markets. I checked trades over the past trading sessions and they say that they're expecting the flows of US crude to Europe to curb by almost 50% this month. And we, at the same time, [are] seeing a rebound in demand for west African crude in, as said, key markets, mostly in Asia-Pacific, which has China and India. Those are the traditional outlets for WAF, like Taiwanese CPC have almost entirely switched to US crude, unfortunately for me, obviously. So to answer your question, I believe we're looking at a slightly more variable outlook for the west African market.

James: Well, that's good news for west African exporters. And you say it's still an important export source for the Far East and the nearer East as well. Obviously, China is a key demand center for west African crude of all types. So that's where we've seen the most rapid rebound in demand after the first wave of Covid-19 infections. What's affecting that recovering demand right now and what's the outlook for west African exporters to China specifically?

Nicola: Quite a few things. So it's a bit sensitive, but I guess sellers of west African crude should send some thank you notes to Donald Trump for his prolonged tug of war with China. That is keeping definitely the door open for west African exports to the country. The demand, as you say, has rebounded recently and it's driven by the restart of economic activities that happened second quarter of this year. But that also led to series of port queues in the Shandong province which is home to the country's independent refiners. And that in June and July was also coupled with floats that obviously hit the country quite heavily. And that cut demand temporarily, I would say.

But now we're seeing an uptick in demand, at least for the last quarter of the year. We're seeing some refiners even trying to expand their capacity, like Rongsheng which is trying to double its 400,000-bl ZPC refinery, I'm not sure I'm pronouncing this right, but so it's going back to the market, for sure. And another thing is I believe it's quite important is the import quotas. As you know, the government releases patches of import quotas for independent refiners on yearly basis. And usually these import quotas are divided into three or more batches, around like three or four. And now what I'm hearing is that independent refiners have used up the quotas and they're looking forward to using the new quotas for 2021, which is gonna start obviously in January.

So what we see at the moment is a rebounding demand for December loading cargoes which means that independent refiners are now booking cargoes loading in December in west Africa. And by the time they reach Chinese ports, it's gonna be almost the beginning of next year. So they're gonna be able to use the quotas again. So, yes, we are seeing demanding for Angola, mostly Angolan crude, I must say, definitely strengthening over the past few weeks. We now have the December loading program that started trading three days ago. And we are seeing like a lot of activity. So, yes, I believe that Chinese demand is definitely back for Angolan crude and for overall, like, Congolese crude as well.

James: That's interesting. So people are kind of stacking up ahead of the new quotas. I guess making assumptions that they'll be rolled over.

Nicola: Sure. And also we cannot forget about the Chinese New Year that is gonna take place early February. So obviously refiners are gonna stock up, well, I mean, in preparation to that.

James: Exactly. Exactly. That's interesting. Of course, key west African exporters, Nigeria and Angola you mentioned, they, of course, are members of Opec. And as such they're constrained in how much they can produce under the current Opec+ output deal. And adding to this, they're having to cut deeper than agreed because of overproduction in the early stages of the deal. So it's a difficult question, really, but what's the current outlook for that agreement and its effects on Nigeria and Angola?

Nicola: It is a tricky question. The current agreement, as you know, is set to run up until like April 2022. So I believe any forecast at this time will be pure assumption, I guess. But I can try. I believe obviously Nigeria's gonna struggle because as you said, has to cut even further. So at the moment we've seen Nigeria that has around 230,000 b/d that has to be cut on top of the current quota. And that has to be cut before the end of this year. So it's really up to Nigeria or obviously the producers in Nigeria on how to obtain such a cut because they can do 50,000 bls next month and 100,000 in December. Who knows? It's really hard and there are no key indications that that will happen in a structured way.

So for the time being what I can say is that they're definitely gonna struggle. Angola, probably not as much as Nigeria because, I mean, as you know, Nigeria has been among one of the serial under-compliers of Opec+ along with Iraq. I believe Iraq now is the producer that has the highest debt, I would say, to clear before the end of the year. Nigeria closely follows. And overall, the Opec+ members need to cut 2.3mnn b/d before the end of the year on top of the quotas. So it is quite a task. Angola, as I said, it's probably gonna have less obstacles to that because of the decline in production. So they might be better placed to achieve such cuts, even because Angola is only to cut 90,000 b/d on top of its quota. So that can be easily done by taking out like a cargo a month, basically.

James: Interesting. We'll come back to the effect of all these things on prices maybe at the end of this podcast. But then just briefly we were discussing the other day that west African exporters have managed to find some unexpected outlets for their crude in recent months. Can you tell us a little bit more about that?

Nicola: Sure. So we are seeing quite a few cargoes heading to the Pacific, but also cargoes going to Saint Lucia. We're talking about Congolese crude in this case. Saint Lucia is a little island in the Caribbean. We also seeing cargoes of west African crude, I believe it's Angolan crude going to Chile. Last time it happened I believe it was three years ago. And also, of course, there are a few niche markets in Asia-Pacific that opened quite recently, like Vietnam or Brunei. So, yes, west African crude is definitely finding ways to, I would say, compensate for the floats of WTI.

James: Sure thing. And just returning to kind of today's markets and maybe looking ahead a little bit, I mean, you've given us a really interesting picture of, you know, a diverse and perhaps growing markets, particularly in Asia for west African crude. So that's good. And then with cuts because the Opec agreements, perhaps less supply, more opportunities to sell. We could see some strengthening in differentials, I guess, looking at it simply. But we've also just seen the new official selling prices coming out from Nigeria. And, well, what do they tell us about Nigerian state producers and NPC's strategy and what's the market reaction to those and more broadly speaking, where do you see this market going in the next trading cycle, let's say?

Nicola: Right, so the west African market, this trading session is quite active, I must say. This compares with kinda like very quiet period over the past five to six months. So what is happening, as you said, like the cuts in productions are obviously helping differentials. Although, I believe that Angolan crude is fairing better than Nigerian crude. So the December-loading program for Angolan crude started two or three days ago and Angolan state-run Sonangol has already placed in China two of three December parcel that happened yesterday. So that is quite fast, I must say. And at the same time it raised the offer for the remaining cargo of Dalian by 40 cents. This is quite an uncommon move for Sonangol. They usually trim offers in order to trigger buyer's interest, whereas like in this case, they're obviously seeing demand from Asia-Pacific strengthening.

So as far as Nigerian crude is concerned we are seeing the overhang of unsold October cargoes completely cleared now and fewer than 20 November cargoes available. So we started to see the new December programs, again, couple of days ago. It looks like exports are lower, are expected lower in December. So we have just received the OSPs for November crude. From October they're being cut for the third consecutive month, and this reflects a decline in values that we've seen over the recent trading cycles. So most of the key grades have been cut and only 3 grades out of 33 are in positive territory. And most of the grades that we're talking about, like the premium to the benchmark are very niche grades, for which one of them are very low. So Egina among the key grades is the only one at premium, which is around like 20¢ premium, which is very, very low for Egina. But it's still among the highest value grades in Nigeria.

WAF crude prices now at a premium to North Sea Dated
Source: Argus Crude

The feedback from the market is that prices should have been at those levels for the past three months. Because what I'm hearing is that despite the rebounding demand, differentials might go up a little bit. For now we're seeing, like, most of Nigerian crudes at discounts to the benchmark. But very few traders are expecting Nigerian differentials to go up from premiums to North Sea Dated because they say that for the time being probably the right prices for Nigerian crude, we're talking about, like, marginal premiums to the benchmark. But this in turn will help clear exports. So it's gonna be, like, a win-win situation where sellers are gonna be able to clear the cargoes without discounting distressed cargoes, and will also help trigger interest in several key markets in Asia-Pacific and perhaps in Europe. So, yes, I believe that the market is now becoming to be more active and I think that the next couple of weeks we're gonna see trade pick up for both Nigerian, Angolan, and probably Congolese crude as well.

James: That's great. That's a more positive picture than I expected. So thanks very much for that, Nicola. I'm sure our listeners in west Africa and anyone who's buying and selling west African crude will have got a lot out of this. So we really appreciate your time.

Nicola: Thank you, James.

James: Just to wrap up, thanks for listening. The daily prices, news, and analysis for over 80 international traded crude streams, please consider subscribing to the Argus Crude service, if you don't already. And for a more in-depth view of west African crude and refined products, we also have, of course, the Argus West Africa Oil service. You can find more information on these services at www.argusmedia.com. Thanks very much for listening, and please join us again on the next episode of The Crude Report.

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