Asian appetite for North Sea Forties crude wanes
Shipments of North Sea crude to Asia-Pacific dropped sharply in July, amid signs that appetite for key benchmark grade Forties is waning in China.
Asian buyers took around 321,000 b/d of North Sea crude in July, accounting for just 11pc of total North Sea production, compared with 21pc in June and 26pc in May. The proportion of North Sea crude output exported to Asia-Pacific last month was the lowest since October last year. And of the cargoes that did head to Asia last month, not a single one was UK Forties crude — historically the favoured North Sea grade among Asian refiners.
More than 60pc of Forties production headed to buyers in Asia-Pacific in the first half of this year. But all of July's Forties loadings stayed in Europe instead, marking the first month without a shipment to Asia since August 2015.
The drop in demand for North Sea crude generally, and for Forties in particular, was almost entirely driven by China. The country's refiners bought large volumes of crude globally when prices dived in the second quarter. The resulting oversupply in the country, combined with port congestion in Shandong and a flood-related drop in fuel demand, have led to a sharp decline in Chinese purchases since.
Additionally, North Sea crude has become less affordable for Asian buyers than in the second quarter, when Covid-19 lockdown measures pushed Atlantic basin prices below those in the Mideast Gulf. The Brent Dubai EFS — the spread between Ice Brent and Dubai swaps — was at a discount of $3.11/bl in April and 91¢/bl in May. But it moved to premiums of 67¢/bl in June and 63¢/bl in July, making Atlantic basin crude less attractive. The EFS has averaged a premium of less than 40¢/bl in early August.
Nonetheless, buyers in Asia-Pacific, including China, have continued to import North Sea crude, but have looked to Norway rather than the UK, with three 2mn bl cargoes of Johan Sverdrup heading to Asia in July, according to Vortexa. Since its start-up in October last year, the heavy Norwegian grade appears to have overtaken Forties as the North Sea crude of choice in Asia-Pacific.
The lack of buying interest has put Forties pricing under pressure. As a relatively sour North Sea grade, Forties would be expected to trade at a discount to a sweeter grade such as Brent. And this was the case when Forties was consumed largely by European refiners. But the advent of Asian buying interest in Forties from 2012 onwards saw the historic 50-60¢/bl spread between the two grades narrow steadily. By 2016, Forties' discount to Brent had largely disappeared.
Forties was even priced at an average premium to Brent of 31¢/bl in April, but that premium dropped to 17¢/bl in May and to just 6¢/bl in June. And in July, Forties dropped to an average discount of 10¢/bl to Brent. In the first few days of August, the spread has widened to 25¢/bl as the lack of Asian interest leaves European buyers to set the price of Forties.
Should Asian demand for Forties remain subdued, this could have an impact on the price of Atlantic basin crude in general. Without the support of Asian buyers, Forties could set the North Sea Dated benchmark as the cheapest of the five North Sea benchmark grades more often, potentially pushing the Dated benchmark lower.
If China's interest in Forties has subsided permanently, there are other buyers outside of northwest Europe that could step in. Already this month, the 2mn bl Aphrodite has departed the Forties loading terminal at Hound Point in Scotland declaring Muara in Brunei as its destination. No Forties crude has ever been delivered to Brunei. Chinese private-sector firm Hengyi started up a 165,000 b/d refinery there last year. It typically runs crude from the UAE and Russia, although it also imports sweeter grades from west Africa, according to Vortexa.
Meanwhile, Italy took more than 2mn bl of Forties in July, having not taken any since 2018. And Finland received its second Forties cargo of the year last month, having not taken any since 2014.
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