March 11, 2014
Asia is buying more Latin American crude than at any time of past 4 years
Oil spot cargoes are 70 percent higher than a year ago, the most since 2010
TOKYO — Surging US crude output is making Latin American oil cheaper than Middle Eastern supply, spurring Asian refiners to accelerate their purchases from Venezuela, Mexico and Colombia.
Spot cargoes to Asia from South and Central America reached 2.51 million metric tons in the week ended November 24, about 70 percent more than a year earlier and the most since at least 2010 in data compiled by Bloomberg from ship charters. Latin American oil is mostly priced off West Texas Intermediate, the US benchmark, while Middle East supply follows Dubai. WTI has traded at an average discount of about US$12 a barrel to Dubai this month, from a premium of almost US$4 in July.
The switch shows how the jump in US oil output from shale is changing global trade flows. The US, the biggest crude buyer, is on track to meet the highest proportion of its own energy needs in more than a quarter century. Asian refiners from Japan’s Cosmo Oil Company to India’s Essar Oil Ltd. are increasingly favoring Latin American supply because the discount makes it a profitable alternative to cargoes from Middle East producers.
“The widening spread between Dubai and WTI has been the hottest issue,” said Hiroyuki Takai, the president of Sumitomo Shoji Research Institute, the Tokyo-based consulting unit of trading company Sumitomo Corp. “The cheaper WTI means Asian refiners have more chances to buy Latin American crude at lower costs. The spread could go wider in the future.”
Horizontal drilling and hydraulic fracturing in the US unlocked reserves trapped in shale-rock formations. Crude production climbed to 8.08 million barrels a day in the week ended December 6, the most since October 1988, government data show. Surging output combined with laws barring the export of most crude grades has swelled inventories, driving prices lower relative to other international benchmarks.
Oil production from North American shale fields will outpace every OPEC member except Saudi Arabia within two years, according to Exxon Mobil Corporation’s annual long-term forecast released today.
WTI averaged about US$4.50 a barrel more than Dubai crude in the decade through 2010, data compiled by Bloomberg show. Dubai has since traded at an average premium of US$11.
Japan, Asia’s biggest crude consumer after China, boosted imports from Latin America by 20 percent to about 37,000 barrels a day in 2013, a threefold increase from 2010, according to trade ministry data. Purchases from the Middle East fell 2.6 percent so far this year, the data show.
“Because WTI is becoming cheaper against Dubai, Latin American crude, such as Mexican crude, is becoming an attractive option for Japanese refiners,” said Keizo Morikawa, Tokyo-based president at Cosmo Oil Company, which operates three refineries. “We are already buying some Latin crude.”
China’s crude purchases from Colombia rose 45 percent to 3.13 million tons in the first 10 months and imports from Mexico expanded ninepercent to 964,050 tons, customs data show. Shipments from Saudi Arabia, the largest supplier, rose 2.9 percent to 45.5 million tons.
The volumes reflected in the ship charters would appear in import data released early next year because a shipment from Latin America to Asia takes at least a month. The spot tanker data may not capture all the cargoes going to Asia because oil companies also book shipments under long-term charters.
“There has already been a trend of diversifying oil imports from Latin America for a while now” by Chinese companies, said Li Li, an oil analyst at ICIS-C1 Energy in Guangzhou, China. “The attractive US benchmark has certainly pushed this trend forward.”
India’s imports from South America more than doubled to 29.77 million tons in the fiscal year ended in March, according to oil ministry data. About 74 percent of the shipments were from Venezuela.
Reliance Industries Ltd., operator of the world’s largest refining complex, plans to buy more from Venezuela next year, Executive Director P.M.S. Prasad said in New Delhi on September 3. The Mumbai-based company currently imports 300,000 barrels a day from the Latin American nation.
Mangalore Refinery & Petrochemicals Ltd., a unit of India’s largest state-run oil explorer, is seeking more Venezuelan crude to run in its new 60,000 barrel-a-day delayed coker unit that starts next month, Managing Director P.P. Upadhya said by phone from the company’s headquarters in the southern Indian city of Mangalore. Delayed coking breaks heavier crudes down into lighter oils and petroleum coke.
“Our refinery has the complexity to process the heaviest of crudes,” said L.K. Gupta, the Mumbai-based managing director and chief executive officer of Essar Oil, owner of India’s second-biggest refinery. “So we, as a strategy, are looking at more and more Latin American crudes.”
Oil is mostly priced off three benchmarks, organized by region and quality. WTI is the primary grade for the Western hemisphere. Brent, produced in the North Sea, is the light, sweet marker for most of the world outside the Americas. In the Middle East and Asia, the majority of heavier, sour crudes are priced against Dubai.
Lighter crude yields more high-value products such as gasoline, jet fuel and diesel. Sweet grades contain less sulfur than sour, and are easier for refiners to process.
Oil from Latin America, mostly medium and heavy grades, can compete for Asian buyers with Middle Eastern crudes such as Saudi Arabia’s Arab Heavy and Arab Medium, Qatar’s Al Shaheen or Iranian Heavy, said Osamu Fujisawa, a Tokyo-based independent oil economist who previously worked for Royal Dutch Shell Plc and Saudi Arabian Oil Company.
China is using government loans and investments in oil projects to tap long-term sources of Latin American crude. Ecuador received US$1.2 billion from China in August to be paid back with oil. Ecuador has pledged about half its monthly crude production to pay down its debt since its first loan agreement with China in 2009.
The Middle East is the largest oil producing region in the world. It accounted for 28.3 million barrels a day in 2012, or about one third of global output, according to data from BP Plc. South and Central America pumps 7.4 million barrels a day.
“We are trying to get Latin American crude,” said Upadhya of Mangalore Refinery. “The shift from Middle East to Latin America will happen, but it will happen gradually.”