Downstream price war: West African crude benefits

In the wake of the slide in oil prices, the Saudis initiated an aggressive pricing strategy to retain market share even at the expense of their rivals in the Organization of the Petroleum Exporting Countries (OPEC). Saudi Arabia also offered customers in Asia the biggest discount on record for its crude. In June 2015, Saudi Arabia pumped a record 10.564 million barrels a day.

Now, the world’s biggest exporter of crude oil is making some moves that could change the face of the global refining sector by taking the battle to downstream and looking to conquer the refining sector as it has quickly become the fourth largest refiner in the world.

There is little doubt then as to why the Saudis are shifting their focus to domestic refining. Along with acquiring a controlling stake in Korea’s S- Oil, they are commissioning a new refinery in Jizan which would have a capacity of around 400,000 barrels per day when it begins operations in 2017. Jizan will come on top of Saudi Arabia’s two other 400,000 bpd- refineries at Yasref and Yanbu, and will turn the country into a major global player in the downstream sector, expanding its campaign for market share beyond just crude oil.

Diesel as flagship

Saudi is offering almost 2.8 million barrels of low-sulphur diesel to Asian and European markets directly competing with Asian refiners and potentially sparking a price war. At $5.60, the Asian refining margins have fallen by almost 50 percent from June this year and are expected to drop by a further 30 percent.

Chinese refiners are also producing more gasoline, for which demand is still strong. Indian refiners are now moving away from Saudi Arabia which was previously India’s largest crude oil supplier. Indian refiners are now buying more crude oil from Nigeria, Iraq, Venezuela and Mexico. As a result, Saudi Arabia was forced to offer discounts on its heavy and sour grade of crude oil to its Asian customers.

Just as they have kept their crude oil production levels intact, it is possible that the Saudis will maintain their current refining output in spite of falling refining margins and eventually end up winning the price war against Asian producers.

One cannot easily neglect the Indian and Chinese refiners. Indian private refiners Essar and Reliance are among the most complex refineries in the world (refineries which are capable of processing heavier and cheaper crude). These two refineries have seen great success recently, following the recent dip in oil prices after a deal was reached between the P5+1 and Iran, and are likely to build upon their already impressive refining margins.

Given current market conditions, the Asian demand for diesel has reduced mainly due to the weakening Chinese market, while demand for gasoline is increasing in India, Pakistan, Thailand, the Philippines and Vietnam. The price for diesel is expected to fall, and gasoline prices will also continue to fall if there are no run cuts in the Asian refineries. This all translates into lower prices of refined fuels will eventually benefit Asian customers who will pay less for transportation, basic commodities and essential services.

West African crude sees big boost

Saudi Arabia’s push its downstream margins means its maximum capacity to export crude is set to decline triggering huge importers of the product to look elsewhere. India’s appetite for West African crude has surged in recent months as one of the world’s biggest consumers of oil looks to shift its focus away from the Middle East.

Sources said there are a host of reasons Indian demand for West African crudes has risen significantly in the past three or four months, including the narrow Brent/Dubai spread, lower ICE Brent, and weaker WAF crude differentials.

Indian demand for light and medium sweet grades from West Africa also rose amid stronger gasoline and middle distillate cracks, ably supported by strong refining margins.

State-owned Nigerian National Petroleum Corporation (NNPC) lowered its July official selling prices for Bonny Light to a 23-cent premium over Dated Brent, the lowest premium since January 2005.

A narrowing of Brent crude prices to Dubai over the past year has made Brent-related crudes more appealing to Asian refiners, and this has incentivized Indian refiners to buy more West African crudes, which are normally traded at a differential to the Dated Brent benchmark.

India imported 2.45 million mt of crude oil in May from Nigeria, up 34.64 percent year-on-year and a near five-fold jump from April, according to shipping data.

India is the largest buyer of Nigerian crude, which is largely light and sweet, and fits the appetite of the Indian state refineries.

Indian state-owned refiners like Indian Oil Corp., Bharat Petroleum Corp. Limited and Hindustan Petroleum Corp. Limited, and private refiner Reliance are all key and consistent buyers of Nigerian crudes like Qua Iboe, Bonny Light, EA Blend, Erha, Usan and Agbami.

In 2014, 18 percent of Nigerian crude exports went to India, according to data from the US Energy Information Administration. More than 25 percent of Nigerian crude imports have been going to India for May, June and July loading.

Similarly, Indian imports from Angola rose to a 14-month high of 1.19 million mt of crude oil, up 74 percent year-on-year, according to the shipping data. India is also a regular buyer of crude from other countries in the region, notably Gabon, Equatorial Guinea, Cameroon and the Republic of Congo.

India’s interest for heavy and sour grades from the Middle East has been on the wane, especially for May, June and July loadings, as it has looked to diversify its imports and has found crudes from other regions more price competitive.

Saudi Arabia supplied 3.08 million mt of crude oil to India in May, down 5.25 percent year-on-year and 17.17 percent from April. Imports from Kuwait plunged 55.78 percent on the year to 852,958 mt, while imports from Qatar were down 62.92 percent at 197,157 mt.

Traders said Indian demand for Iraq’s Basrah Heavy had been particularly low, meaning there was more interest for WAF grades. Even though the quality of Basrah Light and Basrah Heavy crudes are different from West African crudes, with differentials staying very weak for the latter, Indian refiners have found these crudes more attractive in the current refining environment.

FRANK UZUEGBUNAM