Viewpoint: CPC Blend exports up, Urals demand firm

Rising export availability of Caspian light sour CPC Blend in 2019 will need continued strong demand from Asia-Pacific. Tight global sour crude balances are set to keep demand for Russian medium sour Urals firm in the first half of the year.

Exports of CPC Blend averaged 1.31mn b/d in January-November, up by 11pc from the same period in 2017, according to data from the Caspian Pipeline Consortium (CPC). And exports are set to continue rising into next year — CPC Blend exports are scheduled at just over 1.42mn b/d in January, down by less than 1pc from December's 1.44mn b/d, which would mark a fresh record-high if final exports reach that total.

Kazakhstan's crude exports should remain steady at an average 1.4mn b/d next year. Production is forecast to rise by over 2pc to 1.84mn b/d, driven by a 23pc rise in production at the 13bn bl giant offshore Kashagan field, and a 5pc rise in output from the Tengiz field, both of which feed into CPC Blend.

Rising export availability is prompting marketers of CPC Blend to place supplies beyond the grade's home export region of the Mediterranean. Flows of Caspian light sour CPC Blend to Asia-Pacific averaged 346,000 b/d in the second half of 2018 — to mid-December — up from 200,000 b/d in the first half of the year. Exports in November reached their highest since at least 2015 at 460,000 b/d. Volumes going to Asia-Pacific have climbed as voyages to the Americas have dropped off — just 38,000 b/d of CPC Blend sailed for the Americas in July-November, down from 51,000 b/d in January-June.

Asia-Pacific buying interest in CPC Blend used to be limited to refiners in South Korea, Japan and India that can handle the grade's high content of corrosive mercaptans. However, China has shown increasing interest in the grade and this may continue into next year. Around 125,000 b/d of new naphtha reforming capacity has recently come online in China's Shandong province, and this may be prompting demand for the naphtha-rich grade. Chinese refiners have directly received a 135,000t shipment of CPC Blend in November and October, breaking an almost three-year hiatus.

CPC Blend sailed for Linggi, Malaysia, at a steady rate of around 35,000 b/d across June-November, with no prior voyages since at least 2015, Argus tracking shows. Linggi is a common location for ship-to-ship transfers for onward voyages deeper into Asia-Pacific. Unipec and ChemChina have previously fixed tankers on this route.

South Korea — the region's principal buyer of CPC Blend — increased its purchases as the country sought naphtha-rich crude to replace Iranian condensate supply to feed its petrochemical sector. Naphtha can compete with condensate as a feedstock in petrochemical cracking units. South Korea stopped imports from Iran in July, ahead of the reimposition of US sanctions, and purchased 173,000 b/d of CPC Blend in July-November, up from 140,000 b/d in January-June.

Likewise, India cut down Iranian imports from 735,000 b/d in July to 300,000 b/d in November — as the 5 November sanctions loomed — and ramped up CPC Blend purchases from 12,000 b/d in the first half of the year to over 70,000 b/d in July-November.

South Korea, India, and China — as well as Taiwan, Japan, Italy, Greece, and Turkey — received waivers from the US government to continue imports from Iran, but only for up to 180 days. Continued logistical uncertainties surrounding insurance and shipping are likely to prevent a surge in Iranian crude purchases in early 2019, and any Iranian imports to those countries will fall as the 3 May waiver expiry approaches.

With Iranian exports set to remain depressed next year, demand could improve for alternative sour grades — such as Russian Urals.

Lower availabilities of sour crude — as well as lower exports from Iran — have pushed fuel oil margins to multi-year highs in both Europe and Asia-Pacific. This in turn helped push Urals values to fresh highs. Baltic Urals rose to a five-year high of a 40¢/bl premium against Dated on 23 November; 80,000t Black Sea Urals cargoes hit a three-year high of a 20¢/bl premium to Dated on 16 November.

This could be compounded as global sour crude supplies will again be restricted next year, after Opec and its non-Opec partners agreed to fresh production cuts in their meeting in Vienna on 7 December. Opec producers and non-Opec participants in a production restraint deal will aim to remove 1.2mn b/d of output — or around 2.5pc from an October 2018 baseline — from the market over the next six months. Saudi Arabia will account for the bulk of the Opec cuts.

Saudi production will increasingly head to China in 2019. State-owned Aramco signed five new crude supply agreements with Chinese customers to deliver a further 500,000-600,000 b/d to the country, which could further tighten supplies available to Mediterranean buyers.

Russia will contribute to the latest agreement by cutting by 228,000-230,000 b/d from October's post-Soviet record high of 11.4mn b/d, though energy minister Alexander Novak says this will be a "gradual decline," and January production will fall by just 50,000-60,000 b/d.

After Iranian crude, Urals' principal sour crude competitors in the Mediterranean are Iraqi Basrah Light and Kirkuk. Iraq's state-owned marketing firm Somo has allocated around 20pc of its Basrah supplies to Europe next year, broadly in line with 2018 sailings, although it is unclear how much will actually enter the region.

At least four current European buyers of Iraqi crude will receive no term supplies in 2019, and eight regional customers will receive reductions of up to 50pc to their allocations, data compiled by Argus indicate. At least five European lifters' term contracts will be unchanged from 2018 levels, and two will receive higher supplies. These statistics do not account for all European lifters of Iraqi crude.

The reduction in Basrah term supplies comes after Somo contacted several of its European clients to denounce alleged re-selling of Basrah cargoes. It is insisting buyers name a final refinery destination for each cargo. Somo's resale crackdown is likely to result in lower spot availability of the Iraqi grade, which could leave buyers more inclined to purchase alternatives such as Urals.

Sour crude demand will increase further early next year, when Azerbaijan state-owned Socar's 200,000 b/d Star refinery in Turkey reaches full operational capacity. The refinery will run principally on Urals and Kirkuk, as well as Azeri light sweet BTC Blend. The refinery received its first test cargo of Azeri crude in August.