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US west coast refiners to pivot as Saudi supplies drop

27 Jun 2017 20:01 (+01:00 GMT)
US west coast refiners to pivot as Saudi supplies drop

Houston, 27 June (Argus) — Fewer Saudi Arabian crude cargo arrivals to the US in coming months could push US west coast refineries to seek alternative Latin American supplies.

Arrivals of Saudi crude to the US in June are expected to dip below the five-year average of 1.2mn b/d, to 975,000 b/d, as the full impact of the Opec/non-Opec crude production cut agreement begins to show. In July Saudi crude to the US is expected to dip to 850,000 b/d and in August to 750,000 b/d, compared to five year averages of 1.25mn b/d and 1.1mn b/d respectively, according to Energy Information Administration (EIA) data.

Saudi crude accounts for roughly 27pc of total imports to the US west coast, while around 58pc of total imports come from Opec countries.

The effects of the Opec/non-Opec cuts have yet to be reflected in the most recent monthly EIA import data to the west coast, which runs through March. This is because of the time it takes tankers to travel through the Mideast Gulf to the US west coast — Saudi cargoes take about 39-43 days to make the trans-Pacific journey to ports in California. Results won't be felt by the refineries on the US west coast until after March.

The pending drop in Saudi crude cargoes would allow Latin American exporters a greater opportunity as Latin American crude can serve as a strong substitute.

Latin American crude has accounted for roughly 32pc of total imports on the west coast, with Colombia and Ecuador making up around 33pc and 52pc of that amount, respectively, according to EIA data.

Colombia's heavy sour Castilla Blend and Magdalena, along with Ecuador's heavy sour Napo, are generally seen as comparable grades to California's San Joaquin Valley Heavy (SJVH). Colombia's medium sour Vasconia and South Blend, and Ecuador's medium sour Oriente, are potential replacements for Alaskan North Slope (ANS) crude.

In 2016 and the first three months of 2017, Colombian and Ecuadorean crude were all exported to eight refineries in California.

Increasing production of Brazilian sub-salt grades, such as Lula, Iracema and Sapinhoa, could also be poised to substitute Saudi crude on the US west coast. These Brazilian grades have been opening new markets this year, with Taiwan's state-owned refiner CPC buying 1mn bl of Iracema through a sweet crude tender in May and Indonesia also accepting some volume.

Another factor in favor of shifting to Latin American crude supplies is the low transportation cost afforded by the region's proximity. With Saudi crude taking well over a month to reach US west coast refiners, many South American supplies can arrive at the same destination in under a week.

This, coupled with decreasing domestic crude production in Alaska and California, makes the case for Latin American alternatives seem even more viable.

According to the California Energy Commission, ANS crude deliveries to California in 2016 accounted for 187,883 b/d, or 11pc, of supply to California while in-state production provided 561,700 b/d, or 34 pc of supply.

US west coast stockpiles of 51.7mn bl from 2016 will dwindle this year in the absence of Saudi crude, and domestic supply will not fill the gap. Both Alaskan and California crude production have declined by 34pc, or 251,000 b/d, and 16pc, 99,000 b/d, respectively, between 2006 and 2016, according to EIA data.