(Robert Campbell is a Reuters market analyst. The views
expressed are his own)
By Robert Campbell
NEW YORK, April 4 (Reuters) - Sentiment has turned negative
in Western oil markets as heavy refinery turnarounds and
logistical problems lead to unwanted volumes of crude oil, with
no one apparently able to take them away.
Asian crude oil prices, however, have not succumbed
completely to the bearishness. Dubai swaps and Oman futures, the
bases of the price of much of the oil traded east of the Suez
Canal, have steadily gained ground on other benchmarks, such as
North Sea Brent.
The Dubai EFS, the premium Dubai swapholders have to pay to
switch their position into Brent futures, has declined to its
lowest level since November, making it cheaper for Asian
refineries to snap up crude from Europe and Africa. (Dubai EFS
Similarly, Oman futures, which hedge funds increasingly
favor as a way to bet on Asian oil prices due to the opacity of
the Dubai swaps market, are catching a good bid, with the
forward curve strongly backwardated.
Strong Asian demand has been critical in recent weeks to
supporting West African crude prices, which have held at very
high levels even though supplies of other grades in northwest
Europe are weighing on Brent futures.
Nigerian Qua Iboe crude <QUA-E>, for instance, has shown
strength against Dated Brent this month, defying expectations
that it would slip back after a strong showing in March.
(Related graphic: http://r.reuters.com/heg27t)
The resilience of West African crude has perplexed some
observers, who note that Asian refining margins have suffered in
recent weeks because weakening naphtha prices and an overhang in
diesel cargoes have driven Singapore gasoil swaps into contango.
Even more puzzling has been the seeming reluctance of Asian
refiners to snap up the unwanted cargoes of Forties in the North
Sea and Russian Urals in the Baltic that are putting so much
pressure on Dated Brent.
The reluctance to buy in northwestern Europe seems mainly
due to changes in South Korea's tax policy and lingering icy
weather in the Baltic.
South Korean refiners have backed off their heavy purchases
of Forties crude because new tax laws are making the consumption
of duty-free European oils less attractive than before. Combined
with a heavy spring turnaround schedule, the sudden drop in
Korean buying of Forties has exacerbated the downward price from
an already heavy European refinery maintenance season.
Urals pricing has come under similar pressure from Russian
refinery maintenance. But ice in the Baltic has complicated
shipping due to the limited number of tankers available to lift
cargoes under such conditions. Without the shipping, the
arbitrage trade cannot happen.
BARGAIN OR SUCKERS?
In both cases, Asia seems to be tentatively stepping back
into the buying ring. Various companies are reportedly working
on deals to resume shipments of Forties to Asia.
Tanker fixture lists show the shipping arm of French oil
major Total trying to arrange a shipment to Asia or
possibly the U.S. Gulf Coast by mid-month from the Hounds Point
terminal where Forties loads.
On Urals, Chinese trader Unipec looks to be arranging to
move 2 million barrels of the Russian grade out of the Baltic by
the end of April for delivery to China.
While there is no guarantee these deals will go through,
they are a sign that Asian refiners see a bargain and will buy.
That ought to help clear the overhang of prompt crude cargoes
weighing on Brent.
The real question on everyone's lips is: "Will it last?"
Will Asia's refiners be the ones still dancing as the music is
about to stop, or do they see something that the Western market
Asian refiners tend to have a longer-term perspective, given
the sailing times needed to meet requirements. A Chinese
refinery purchasing European oil today, for instance, will not
receive it until June or July.
The resilience of Asian crude prices suggests regional
traders are seeing strong demand beyond the current spring
But there are serious questions about the strength of Asian
demand for oil products. Skeptics note that naphtha prices have
plunged due to weak petrochemical sales, while regional diesel
markets are signaling an overhang of prompt cargoes as Chinese
refiners export more of the fuel.
Similarly, Asian distillate prices have swooned against
strong crude. Gasoil cracks in Asia recently hit a 10-month low
amid brimming supplies triggered by weak demand from major
importers like Indonesia and Chinese exports.
Yet there are hints that some of the prompt weakness in Asia
is due to destocking after a first quarter of extremely strong
refining margins led to overproduction.
Already gasoil prices are creeping up, and refiners are
profitable, even at current levels. (Singapore
gasoil crack graphic: http://r.reuters.com/wag27t)
While demand in Europe looks certain to continue to decline,
North American oil consumption is stabilizing, with distillate
fuels posting sales gains as revised data clears up the picture.
January monthly data released by the U.S. government during
the Easter holiday showed distillate demand rising sharply to
more than 4 million barrels per day, no doubt helped by
continued growth in trucking volumes as well as colder weather.
(U.S. distillate demand graphic: http://r.reuters.com/tag27t)
That is why oil traders ought to watch Asian markets. If
they catch the cold Europe is currently suffering from, the
turmoil in world oil prices will deepen.
But if what is happening in Brent is due more to short-term,
local factors, then there is much less reason for pessimism.
(Editing by Lisa Von Ahn)