The Crude Report — Ripple effects: The impact of Russia-Ukraine on the West African crude market

Argus Crude deputy editor Nicola de Sanctis joins James Gooder in this episode to discuss how the disruptions to and redirections of Russian supply are affecting that other great swing producing region — West Africa.

We also give an update on changes to our pricing methodology for a couple of Nigerian crude assessments, and where to find them.

Argus publishes more West Africa crude prices than anyone else - click through to learn more.

Transcript

James Gooder: Hello, and welcome back to the Argus Crude Report podcast. This is a regular series in which we pick apart some of the trends in the global crude oil markets and try to elucidate for our listeners what's really going on.

My name is James Gooder. I'm VP for Crude, based in London, and I'm very pleased to welcome back Nicola De Sanctis, who is our deputy crude editor, also based in London, and he's the head of our West Africa coverage.

Nicola De Sanctis: Hey, James. Thanks for having me back on the podcast series.

James: It's good to have you with us. It's been a while since we've had a look at what's happening in West Africa. And I think it's a really interesting time to do that. Because, of course, we have the Russia-Ukraine conflict going on.

And that has really scrambled a lot of the typical crude oil flows around the world. And rather like Russia, West Africa is a very important swing producer, right, which has gotten outlets for its crude both in Europe and in Asia, and other places, too. So, I'm really curious to find out what the disruptions of the Russia-Ukraine conflict and war, let's call it a war, is having, and particularly, how that's affecting the West African market. So, what's your take?

Nicola: Right, basically, obviously, the conflict in Ukraine has affected the oil markets, mostly in the Atlantic Basin, I would say. And the biggest impacts, I believe, are being felt in northwest Europe and in the Mediterranean, which are usually supplied by Russian Urals from both the Baltics and the Black Sea, and the Baltics, where we have Primork and Ust Luga, whereas in the Black Sea, we've got Novorossiysk. So the Mediterranean and Northwest Europe, are also outlets for West African crude.

So the shortage of medium sour crude from Russia has led to a brief jump in demand, which is actually now ongoing for North Sea grades, in particular, like Forties and Johan Sverdrup , which offer some good alternatives to Urals. But it has yet to convince, say, European refiners to aggressively target West African grades so far. West African grades can go can offer, like, a wide spectrum of grades from very heavy to very light.

But the problem is...there's not much of a problem, but they're much sweeter than the Urals with only, like, a few grades in Angola, like Mostarda, which I would say it’s a newer grade in Angola and Saturno that might offer, like-for-like alternative to Urals.

James: Yeah. Interesting. I mean, Urals, of course, has been the baseload of European refining for many years, and it's not gone yet, of course. I mean, a lot of euros are still coming through term contracts, which are gradually winding up as this year goes along, though, the spot market of course has dried up, at least a portion of it, which is transparency, price reporting agencies like us.

So it may be a gradual effect, but in terms of, you know, a little bit more specific on the Angolan crude, what's happening? Obviously, we have this Brent/Dubai spread, which is still quite wide. It means it's harder to move Angolan crude to China as typically it would go. And so are we starting to see Angolan crudes finding their way into other places?

Nicola: Well, so far things in Angolan crude have actually slowed a bit because of the reintroduction of lockdowns in China. And obviously, as you mentioned, the arbitrage economics are not very favorable for both exporters and importers of the Angolan crude, I would say, in Asia Pacific.

Now the introduction of lockdowns in China are now being coupled by the refinery maintenance season, which is affecting runs from state-owned refiners and particularly Sinopec, for instance, the trading arm of Sinopec, Unipec, which is the main buyer of Angolan and Congolese crude is heard to be trying to resell most of the Angolan supplies that it had previously secured via monthly locations or through its joint venture with Angolan Sonangol, which is called SSI. So this is obviously taking out of the market, like, one of the biggest buyers.

On top of this, the Chinese government has now almost banned the exports of oil products of, like, gasoline or diesel, or jet fuel to lower the prices of domestic supply is obviously having, like, a massive impact on demand for Angolan crude.

And we are seeing differentials for some of the Angolan key grades or key exports to Asia like Cabinda or Girassol that have shed, like, more than a dollar per barrel from February and March. They're almost reaching the lowest assessment so far this year. And so we could say that the demand outlook for Angolan crude or Congolese crude, like Djeno, has seen better days.

James: It's really interesting. I mean, people initially were expecting that some of these medium-heavy grades would be a lot stronger given the absence of Urals from the market, but in fact, we're seeing pressure all around. It's kind of an interesting confluence of events.

So that's Angola and crudes of that type. What about Nigeria? Of course, Nigerian crude lighter, sweeter, and it's competing in Europe, maybe with North Sea crude and you said that those differentials have been quite firm. What are you seeing in the Nigerian export market?

Nicola: Yeah. Nigeria has been a bit different, very volatile in the last few weeks. We have observed a temporary spike in demand at the end of last month when we were seeing that some of the European refineries were, kind of, buying medium and light, sweet grades from Nigeria.

This has brought the assessments from some of the grades that are usually covered in Europe, such as medium sweet Egina or Escravos or Bonga to temporary record high for Egina or multi-month high for Escrvaos and Bonga between the end of March and the first week of April. Egina, for instance, has touched a premium to North sea of almost $4.50/bl.

James: Wow. For medium sweet crude.

Nicola: Yeah. But it seems that this buying excitement has proved short-lived because differentials are now falling back, although, they remain pretty solid. I'd say like for Escravos in Bonga, we still seeing like $2.5 premium, whereas Egina, I believe, now it's still around, like, the $3 a barrel premium to North Sea Dated.

We've seen that the European interest in Nigerian grade has been impacted mostly by a spike in freight rates for Suezmax cargoes, going from West Africa to Europe, which is now, I believe, they are at the highest since mid-2020. This obviously has eroded buy interest from the region.

And some buyers have even had to use co-loads on VLCCs, which are obviously much bigger than Suezmax can hold up to two million barrels to bring Nigerian or even Angolan crude through to Europe. And this is very unusual, in most cases, it's not very cost-efficient.

So the demand for Angola has also declined due to ongoing persistent issues, some of the terminals, namely Bonny Light and Brass River in recent months. So Bonny Light exports, which are favored in both Europe but also in India, and now are down to almost a cargo month, which compares to a more usual, like, five or six cargoes, with Sehll declaring force majeure on exports in early March. And I believe it has yet to lift force majeure on exports, as far as I know.

In the meantime, like, Italian Eni has put Brass River experts also under force majeure in the first half of last month after a blast of one of the pipelines at the terminal. So buyers in Europe are understandably growing a bit skeptical on the availability of such grades. And last but not least, Indian appetite for Nigerian grade has also waned in recent weeks as refiners are getting more and more supplies of euros according to traders.

It seems that Indian refiners have taken almost 14 million barrels of heavily discounted Urals . Yes, a lot. And this is basically, like, more than what they took in the whole of 2021. So, yes, demand from India is not as it used to be in previous cycle, I would say.

James: No kidding. I mean, that's incredible. Certainly, no hesitation when it comes to going after a bargain. I mean, of course, euros has been offered in Europe at, like, something more than $30 below dated. So I don't know exactly because I believe the Indians may be buying it on a delivered basis. But either way, it must be difficult to resist low prices like that.

Nicola: Indeed.

James: That's super interesting. Thanks very much for that overview. Speaking of Nigeria, I think we have an update to share on our own coverage of the West African market.

A couple of grades that we've moved over from the West Africa oil reports into the main Argus Crude report...I'll ask you a little bit more about that in a second, but just for the benefit of our listeners who perhaps don't have access to both of those in the main Argus Crude reports, Argus assesses the price of West African grades, as we do grades all the way around the world based on market activity.

So reported trades, bids, offers, a survey of market views, both sides of the market produces refiners and also the traders in between to come to a consensus value. So that's the traditional price reporting model. But of course, there are lots of grades in West Africa that don't have that transparency that we need to make those assessments.

But people in the region and elsewhere still want to know what those crudes are worth. So in the West Africa report, what we do is we look at the refinery gate value based on the PIMS refining model, which Nicola can tell us a little bit more about, but the basic principle is we look at what a given grade is worth.

And we look at the refining value of a grade that we do know the market value of, let's say, Qua Iboe from Nigeria or Girassol from Angola, something with a bit more liquidity, right? And that difference allows us to assign a value to that grade. So theoretical market value but importantly, that's not based on transparent trade.

But, occasionally, partly, I think as a result of the focus that we bring to these grades, this has happened in the past with things like Ghanaian Jubilee, and Djeno from Congo. Occasionally, the value or the focus that we bring allows us to start discussing what the real market value of these grades is. And that means we can upgrade the method, if you like, and move it over. So what's the latest there and which grades are we moving over, Nicola? What can you tell us about them?

Nicola: Yeah. So, basically, in the last couple of months we decided to move two Nigerian grades from the [Argus] West Africa Oil report to the [Argus] Crude report. And these two grades are medium-sweet EA blend and slightly lighter CJ blend, which is the newest Nigerian grade. In particular, the latter is actually has ramped up production to almost 50,000 barrels a day, which is divided into two shipments of 650,000 barrels.

James: Yeah. I mean, I think when you add them all up, the grades that we assess in the Argus through the traditional method, plus those in the West Africa report, I think we've got more than any other publisher. It may sound like we're removing grades from one report, but we don't want to let those subscribers down.

So I know we're always on the lookout for further assessments that we can add. Can you tell me a little bit about what's required in order to add new grades to the West Africa oil report?

Nicola: Basically, what is required, we need to have an Assay for the crude obviously. And then we need to make the Assay readable through the PIMS model. So this is something that we're thinking of. We are considering, like, adding even more crude grades from Angola, Cameroon, or Congo, or Gabon, Ghana, obviously, from West Africa.

This could also be, like, from Ivory Coast as well. But before doing that, we are in the process of optimizing our PIMS model configuration at the moment, which is gonna give us the opportunity to better reflect the potential values of these grades for which market can be sometimes a bit illiquid.

So, at the moment, what we're doing, we're working on updates to the FCC unit, as well as revision of a given refinery own consumption. Also, something that is quite interesting, we are working on a model to reflect how the current European legislation on CO2 emission may impact refinery economics. Just to name a few updates.

James: Interesting. I mean, that does sound like it's going to make those prices even more reflective. Of course, it's impossible for a model ever to reflect reality perfectly, right? The more accurate we can get, especially now when refiners are dealing with very high costs for inputs like natural gas and hydrogen, and all of that. It's very important to make sure that those configurations are reflective. Well, thanks for that update.

Nicola: Sure.

James: That's fantastic. I would appeal to anyone listening, I guess if anyone's listened and they are interested in West African crude, and if there are any grades that you would like to see reflected in our reporting that are not currently there, please let us know. You can get in touch with Argus through the usual channels.

And I think in the information on the homepage that you've clicked through to get here, we'll have a link to the Argus West Africa and the crude reports so that you can see what the coverage looks like at the moment. So keep in touch. Thanks very much for listening. And thanks so much, Nicola, for joining me.

Nicola: Thank you, James. Always a pleasure.

James: That's it. Thanks for tuning in. Keep in touch and keep safe.