Nigerian, others’ crude may add to glut in Asia soon


Asian refiners are stepping up purchases of cheap Nigerian and other West African crude for September delivery after prices hit multi-year lows, threatening to increase a supply glut that is blunting the appetite for Asia-Pacific crude.

Weak Asian demand and high shipping costs have kept buyers away from West African cargoes in recent months, but a large backlog of oil has now pushed down prices, tempting Asian buyers back into the market, traders said.

It was learnt that move will put further pressure on crude exporters Malaysia, Indonesia, Vietnam and Russia, which have already seen price differentials for their grades fall as refiners facing poor profits from processing crude into oil products such as gasoline and diesel reduce buying.

“West African producers are scrambling to place their crude,” said a trader with a regular Asian buyer of oil from the region.

“The crude should start to move to Asia soon. When that happens, we’ll see downward pressure on the Asia-Pacific grades,” the trader said.

An overhang of West African crude has grown as a shale boom has curbed exports to the United States, along with weak European refining margins and soft Asia demand.

Asian buyers also switched to Latin America and other regions as a global glut in crude supply caused a slide in differentials for grades from multiple regions. West African crude oil exports to Asia are expected to hit a one-year low this month.

However, West African crude differentials have fallen against Brent, the European benchmark, while Brent has also come off in recent weeks, making West African crude more attractive for Asian refiners relative to the Middle East.

Brent’s premium to Dubai swaps this week fell to its lowest in nearly four years.
Asian buyers are turning back to West African oil, and cargoes are selling at a faster rate for September than for the previous two months.

The purchases comes as Asian producers get ready next week to start marketing barrels due to load in October. But by then, traders said tankers carrying cheap crude from producers such as Nigeria and Angola will start arriving in Asia after their 30 to 40 days journey.

“Demand is still not great, but it came to a point where they feel it’s ok to move,” a West African crude oil trader said.

In a rare move, Taiwan’s Formosa Petrochemical last week bought a cargo of Angolan Girassol crude, which will be delivered on October 1-20, suggesting to some that prices may have bottomed.

“The deal gives sellers more steel and buyers a sense that they may not be able to rely on getting a further 50 cent discount for cargoes,” a trader said. Still, some traders say that despite improving economics, high freight rates are limiting the flow to Asia.

Day rates on the largest crude tankers carrying crude from West Africa to Asia could fall further, after coming off a spike last month.

“The market has slipped, and there is scope for rates to fall further,” a source with a large ship owner said.

However, the longer term outlook for light sweet Nigerian oil moving to China may be limited by refinery upgrades in the world’s second largest consumer of oil.
More modern refineries are able to take heavier, higher sulphur oil that is cheaper, taking away another source of demand for Nigerian crude, whose differentials have already fallen to their lowest in five years, with competition from US crude hammering demand.

“There’s a new world order now. I think differentials could fall to flat, or even negative,” a trader said, referring to Nigeria’s benchmark Qua Iboe crude, which is currently at around 80 cents above dated Brent, it’s lowest since 2009.

—-International Trade Monitor