The ongoing conflict between Russian and Ukraine has prompted a need to replace Russian Urals and ESPO.
Sour crude demand from Latin America and the US Gulf coast has increased to help fill the gap left by bans on Russian supplies.
As price volatility increases amid geopolitical tensions, Argus also re-launches two Latin American price assessments.
Alex Endress: Hello and welcome to the "Crude Report" podcast series on global crude oil markets by Argus Media. I'm Alex Endress, Associate Editor for Argus. And I'm pleased to welcome Giovann Rosales who is our Latin America crude reporter based in Houston. Giovann, thanks for joining today.
Giovann Rosales: Hi, Alex and thank you for having me on the podcast series.
Alex: Good to have you with us. You know, it's been a while since we've looked at some of these sour grades out of Latin America, and it would be interesting to know how the LaAm markets have reacted during a lot of the recent geopolitical tensions and price volatility. So, of course, let's start with the obvious there's an ongoing conflict between Russia and Ukraine, which has prompted a need to replace Russian Urals and Espo. How does Latin America crude play a part?
Giovann: All right. So that's been one of the hottest topics, right? What can replace Russian grades? And it would be hard for any one country to replace them. But Latin American sours could help fill some of the gap. So to really understand this, it's important to look at where production stands for each country. So I want to talk a little bit about Country By Country production. Last year, Colombia produced just above 736,000 barrels per day, Ecuador produced more than 447,000 barrels per day, and Peru was just under 40,000 barrels per day. So there are constant disruptions to crude productions in Latin America. Last year in May and June, production in Colombia was cut by about 2 million barrels. That was following social unrest in some of its oil fields, including Ecopetrol, Yarigui-Cantagallo, Castilla Norte, Rubiales, Indico, and Florencia Mirathol all fields in Colombia. And in Ecuador, the country had to declare force majeure last December. There was heavy rains that caused severe riverbed erosion that forced the shutdown of the Sote and the OCP pipelines, which are the main export pipelines in the country. And then in Peru, indigenous protesters occupied a pumping station on 100,000 barrels per day pipeline that forced Petro Peru to close the route. Protesting in Peru has simmered on and off for years. And although protests are meant to target the government, it ultimately impacts the oil industry.
Alex: So it sounds like there have been a few disruptions over the past year in several of these countries. And it's my understanding, there's really not much in the way of crude oil storage. Is that right?
Giovann: Yes, Alex, that is correct. These countries do not have large storage capacity. Therefore, production must come to a halt, if any of its export pipelines cannot operate. So can Latin American countries or Latin American grades replace something like the lost volumes of Urals? The answer is no. Because there just isn't enough crude being pumped out. But there are plans to increase production across the Latin American countries and to minimize the disruptions. So grades like Vasconia, from Colombia, or Oriente from Ecuador, can help fill in some of the gap. I believe that the flow of Latin American sours may just start to shift, or there may be new buying interests that emerges if the conflict continues.
Alex: Yeah. And speaking of Latin American flows, where do you see those going recently? Has there been any change from the norm? You know, what we're used to seeing?
Giovann: No, not really any change. You know, the main outlets for these sour grades are China and the U.S. And you know, Alex, one of the primary destinations for Latin American sours is actually the U.S. West Coast, and that's not just for sours, but for sweets as well. Some of the grades that often make their way to the West Coast are Colombia's Vasconia, Ecuador's Oriente, Argentina's light sweet Medanito, and Guyana’s Liza. And so the outlet or demand from the region has kept prices mostly steady, even as the U.S. and member countries of the IEA announced plans to release more crude supply. We did observe some initial downward pressure, but it seemed to be short-lived. Vasconia, for example, had slid by only about 55 cents per barrel since the end of March when Biden announced plans to release more crude. And then at first fell by 5 cents per barrel following the initial announcement and another 50 cents per barrel the week after, but the grade has been steady for about the last week or so. Now, Alex, if coastal sours are pushed out into international markets, it may disrupt the flow of Latin American sours to places like Asia Pacific. Is that what you're seeing at the Gulf Coast?
Alex: Yeah, good point. We are seeing a decent amount of export interest in these U.S. sour crudes. That could be a replacement for Russian Urals that we know has been widely banned. Mars loadings, for example, from St. James and Louisiana and as well as the Louisiana Offshore Oil Port, or LOOP, are on pace for about 164,000 barrels a day in April based on Vortexa data. And Mars exports from those ports averaged about 120,000 barrels a day in March. And that included the first delivery to Europe in about two years which went to Germany. More recently, we've heard discussion in the market of two May loading cargoes for Mars, and those include one planned for South Korea.
Giovann: And has the recent sale of SPR crude been much of a factor? I heard that the 1 million barrels a day sale of sour crude would likely stay in the U.S. Gulf Coast.
Alex: Yeah, that's a good point. It did have an effect. The SPR sale, we know it supports sour crude volumes at the Gulf Coast. And while the Biden administration ordered the release to lower transportation fuel prices, we saw that it led to pressures further upstream in the sour crude market. So when the month began, we saw Mars trading at a discount it was at about a $2.67 discount to the light sweet crude benchmark at Cushing, Oklahoma. That's NYMEX WTI. But since then, it actually has flipped to a premium, an 18-cent premium over Cushing. And more locally, Mars was at a wide discount to LLS. But we've also seen that trend upward over the past month, from where it started at a $4.77 discount to LLS at the start of the May trade month to now $1.49 as of the 20th of April. So it did lower prices, but we've seen, you know, as there's been more export interest to replace things like Urals, a good bit of support for Mars, and that spread there between Mars and LLS, that actually is a key indicator for Louisiana refinery slates.
Giovann: Yeah. So that's very interesting. And it definitely seems like that crude will come into play and compete with some of the Latin American grades potentially at the U.S. Gulf Coast that is a popular destination for Colombia's Castilla and Vasconia. And it also seems like it'll compete internationally as well because the Colombian sours do go out internationally. For example, a big hub for Castilla is Asia-Pacific.
Alex: Yeah. I think you're spot on there to your international point. The SPR releases, they will support export volumes simply just by putting additional supply into the market. So we know that up to 26.5 million barrels of sour crude can be delivered in May and June and that would make it the largest strategic release in history. SPR crude is simply just a blend of domestic and global crudes sorted in sour and sweet caverns in Texas, and Louisiana. Theoretically, they could be loaded for export from the U.S. It just depends on, you know what's available, and you think about just more sour crude in the market. That opens up opportunities for more export arbitrage. But that about wraps it up on my end, for today's podcasts. Although before we go, I know that Giovann has an announcement for us.
Giovann: Yes, I do a very exciting announcement. I do have an update that I'm very excited to share. Argus relaunched the Napo and Oriente assessments this week. So production in Ecuador is expected to reach 580,000 barrels a day this year and Petro Ecuador which is the state-owned company that produces Napo and Oriente is renegotiating the oil-backed agreements it holds with Asia Pacific companies. So this is going to allow it to free up more of its crude into the spot market. For example, this year, the company has already placed about 13.3 million barrels of Oriente crude on the spot market. And that actually makes up more than 80% of what was sold last year, which was a little over 16 million barrels. And so we found that market participants were interested in seeing published prices and well, we got to work. And we relaunched the assessments on April 18th.
Alex: That's really exciting news. Giovann, thanks for sharing. I know we will have listeners that will be interested to hear that. And listeners, if you're in need of more in-depth daily coverage of America's crude oil markets, consider subscribing to Argus America's crude. That's where you'll find these relaunched Napo and Oriente assessments, and you can find more information on those as well as other services at www.argusmedia.com. Thanks for tuning in and we look forward to you joining us on the next episode of the "Crude Report."