A flood of light crude oil set to arrive in Asia will likely push prices for regional grades lower, crimping revenues and potentially creating a supply surplus since local refiners are ill-equipped to process all of the flow.
Price differentials for Malaysian crude grades, particularly the light Kimanis grade, should decline as a surge in cargoes from the United States and Europe is due in Asia in March and April, said multiple traders who participate in the Asian regional crude market. Light crudes are grades with a lower density and typically produce more gasoline and diesel fuel when refined.
BP and Trafigura [TRAFG.UL] are marketing at least 3 million barrels of U.S. Eagle Ford crude in Asia, three traders said.
From Europe, some 4 million barrels of unsold North Sea Forties crude are likely to arrive in Asia in March or April, three trading sources with knowledge of the matter said. Glencore and Azerbaijan’s Socar each have 1 million barrels on hand, while Trafigura was offering another 2 million barrels, they said.
A record 10 million barrels of North Sea crude loaded in January for Asia, close to a third of the region’s total exports, Eikon data showed.
A narrowing in the price difference between Middle East benchmark Dubai and European benchmark Brent and U.S. West Texas Intermediate oil has opened the arbitrage for the light oil to come to Asia. Brent’s premium to Dubai swaps averaged $1.64 per barrel in January, the lowest since September 2015, data on Thomson Reuters Eikon showed.
“The overall Atlantic Basin arbs into Asia in Q1 are at the high (end) of historical ranges,” said a Singapore-based senior trader with an international oil company who declined to be named due to company policy.
The premium for Malaysia’s Kimanis for April-loading may fall to below $3.50 a barrel to benchmark dated Brent prices from as much as $4 for March-loading supplies, said three traders who participate in the market.
“The arbitrage volumes will kill off Malaysian crude oil values,” one of the traders, based in Singapore, said on condition of anonymity.
The light oil from the U.S. and Europe is arriving at the same time that Saudi Arabia has boosted light shipments to Asia to offset cuts in heavy crude to meet its commitments to the Organization of the Petroleum Exporting Countries supply cuts.
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Additionally, Abu Dhabi, part of the United Arab Emirates, has raised exports of its Murban light grade after a refinery outage.
Other light grades from the Mediterranean are set to come East as well. At least half of the Azeri Light for February loading should sail to India, China, Vietnam and Taiwan.
Also, about 1.5 million barrels of Algerian Saharan Blend loaded in January for Asian delivery, the most since September, Eikon data showed. Trading house Lord Energy is offering a million barrels of the grade for April delivery, two traders said.
Still, Asian refiners are limited in their ability to run light crude since most of them have upgraded to process cheaper high-sulfur heavy grades.
“A lot of the new refineries were built to take crude with API of more than 30 degrees if not lower,” a veteran oil trader said.
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