Argentina's crude is poised to widen its reach across international markets as rising production will allow for more exports and help offset the driving force behind this year's falling prices: higher freight rates.
Argentina's heavy sweet Escalante flipped to a discount to the Ice Brent benchmark twice this year: once in early August and then in late October when it held a $1/bl discount to Ice Brent. Light sweet Medanito, which was re-launched as an Argus assessment in mid-September, dipped to its lowest at a $2.50/bl discount in late October as well. Market participants cited a rise in freight as the culprit for Escalante and Medanito differentials dipping into deep discounts.
As freight rates began to ease later in the fall, both crudes started to rise against the international basis, with Escalante moving back into premiums in late November and Medanito rising to a $2/bl discount in early December.
But as crude output rises in Argentina's prolific Vaca Muerta shale region, so will exports as production gains increasingly outstrip domestic demand. Most Argentinian crude producers will be highly incentivized to maximize exports because crude in the domestic market sells at $5/bl to $7/bl lower than in the export market.
In the shale-rich Neuquen province, crude production already surpassed the target goal of 235,000 b/d in November, marking the highest in 17 years, according to Argentina government data. Provincial governor Omar Gutierrez said he expects production to reach 300,000 b/d in 2022 and 400,000 b/d in 2023.
As production increases, market participants are expecting spot liquidity to increase, creating between three to six cargoes of Medanito per month, and an average of 1mn bl/m of Escalante starting in 2022.
Vortexa data shows that between January and mid-December, 141 shipments have departed from Caleta Cordova and Puerto Rosales, which are the traditional load ports for Escalante and Medanito. Although slightly more than 69pc of the vessels loaded with crude were destined to other ports in Argentina, the remaining 31pc of Escalante and Medanito-ladden tankers made their way to international waters.
Among the more frequent destinations for Argentinian crude is the US west coast. US Energy Information Administration (EIA) data show at least 9mn bl of Argentinian crude arriving at US shores this year as production ramped up from Vaca Muerta, which includes Neuquina.
Other international destinations include the port of Fujairah in the UAE, where heavy sweet Escalante is used to create bunker fuel compliant with cleaner international marine fuel standards, Rotterdam, and other ports in China, Brazil and Chile.
Even as the threat to demand from the new Covid-19 Omicron variant looms, January volumes of Argentinian crude have remained mostly steady since news of the variant broke over the US Thanksgiving weekend. Premiums for Escalante are averaging near $1/bl over the Ice Brent benchmark and discounts for Medanito are averaging $2.25/bl, signaling that whatever course the variant may take, it may have a limited impact on differentials next year.
Additionally, Argentinian crudes could find support as tightening environmental regulations prompt crude buyers to seek out sweeter crudes. As the appetite for sweet crude grows and production increases in Argentina, the South American country will be well positioned to continue to diversify export destinations globally, even if prices fall in 2022.
