Outlook for West African oil on resurging demand

A Reuters’ survey of traders and shipping data released recently indicated that China’s surging appetite for West Africa’s crude grades pushed loading to 13 years high with a supply of 40 cargoes.

Through state-run firms UNIPEC and SINOCHEM along with trading houses supplying the independent refineries, February loading signals positive demand growth for West African crude grades.

At a level of 1.36 million barrels per day (bpd), Reuters says this is the highest since it began tracking the shipments in 2004. The purchases boosted overall shipments to Asia from West Africa to 2.31 million bpd, their highest since April 2015, and 28 percent above the previous month on a bpd basis.

Why the frenzy

The buying was driven in part by a narrow spread between Brent and Dubai crudes, which make West African grades more competitive in Asia.

Michal Meidan, Asia analyst with Energy Aspects, said the figures were “not overly surprising given the OPEC production cuts and Asia’s need for alternative barrels”.

This is largely driven by the production cuts of 1.8 million bpd by the Organization of the Petroleum Exporting Countries (OPEC) and other oil producers including Russia.

At the last OPEC meeting in Vienna last year, members agreed to reduce output to a range of 32.5-33.0 million barrels per day from a current output estimated at 33.24 million bpd to reduce a supply glut that has cut prices by more than half of 2014 levels.

Nigeria and Libya were allowed to maintain output volumes projected at 2.2 million bpd and about 500,000 bpd respectively.

Apparently, the Reuters survey indicated that supply cap agreement is taking a toll and has sent refineries scrambling to source alternative medium and heavy crude oil.

Also, falling oil output in China has intensified the need for alternatives. The country’s crude oil output is expected to drop by 7 percent by 2020 compared with the previous five-year plan as output from some of the nation’s largest, but oldest, wells falls, while natural gas supplies will slow by almost two-thirds.

Under a plan covering the period 2016-2020 published by the National Development and Reform Commission (NDRC) in January, crude output will be around 200 million tonnes by 2020, equivalent to 4 million barrels per day (bpd). That would be down from 215 million tonnes in the 2011-2015 plan.

The drop reflects falling output at aging, high-cost fields as producers scale back production in a lower oil price environment. For the first 11 months of 2016, production was down 6.9 percent at 182.91 million tonnes, just under 4 million bpd.

Analysts at Wood Mackenzie, forecasts a decline of nearly 500,000 bpd in Chinese crude oil production over the next four years at 3.5 million to 3.6 million bpd.

“We don’t see any large greenfield oil developments coming stream by 2020. As such, given the maturity and age of the main oil fields we forecast an ongoing decline in output,” said Angus Rodger, Woodmac’s upstream research director.

West Africa stands to benefit from China’s falling crude oil output. Meidan further said that Chinese buyers are also stocking up in anticipation of higher oil prices in the second half of the year.

The Chinese buying centred on Angolan crude, with less than a dozen cargoes of the loading plan from that nation sailing to destinations outside Asia.

China’s state-run refineries also bought one cargo of lighter oils, including Nigeria’s Bonga and Akpo condensate. Other Asian buyers have also boosted purchases of light sweet oil, including Nigerian grades, pushing regional grades lower.

Outlook for oil

There has been a rash of positive outlook for oil in 2017. Wood Mackenzie forecasts a possible return to profitability of global oil and gas sector by 2017 after five years of only single-digit returns in a note sent to BusinessDay last month.

According to the organisation’s analysis of the oil sector outlook, exploration in 2017 will continue its transformation to a smaller, more efficient industry hence overall investment will at best match 2016 year’s spend of around US$40 billion, and may yet fall further.

Wood Mackenzie also stated that the majors and a handful of bolder Independents will drill most of the wells to watch, as in both 2015 and 2016. It expects the best discoveries to come from new plays and frontiers, despite greater emphasis on infrastructure-led drilling from many explorers.

“The industry has a good chance of achieving double digit returns in 2017. Smarter portfolio choices and lower costs are already paying off,” said Andrew Latham, vice president of exploration at Wood Mackenzie.

He added, “More than half of the volumes are expected to be found in deep water. Here some well costs will fall to US$30 million or less, with full-cycle economics that are positive at less than US$50 per barrel.”

However the International Energy Agency (IEA) has had to tone down optimism. It does not expect oil demand to peak any time soon due to rising consumption in developing economies, Director Fatih Birol said recently.

Birol also warned that oil markets could enter a period of high volatility unless companies develop new projects after two years of sharp drops in investments sparked by low oil prices.

“We do not see in the near and medium terms oil products can be substituted by other fuels. More than one third of growth comes from trucks in developing Asia… We do not subscribe to oil demand peaking anytime soon,” Birol said at the GE Oil and Gas annual meeting in Florence, Italy.

“If there are no major new major projects this year, it will be very difficult to see how we do not have turbulent times in the market in the years to come because of the growing supply gap.”

Asia appears as the hottest market for crude oil in the world currently. Reuters learns that some 4 million barrels of unsold North Sea Forties crude are likely to arrive in Asia in March or April from Europe.

Glencore and Azerbaijan’s SOCAR each have 1 million barrels on hand, while Trafigura was offering another 2 million barrels, sources say. This does not include surges expected from shale oil producers who are betting on better margins from the OPEC supply cap deal.

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.

To compete in the high wire Asian crude market, West African oil producing countries would need to resolve issues causing supply outages like militancy in the Niger Delta and streamline process for forward contracts.

Last month, Nigeria’s crude oil lifting contracts were tilted to favour local oil marketers and Indian refiners indicating that the pulse of the market is increasingly Asian.

Another challenge is that light crudes prevalent in West Africa have lower density and typically produces more gasoline and diesel fuel when refined but are favourites with many Asian refiners who are limited in their ability to run light crude since most of them have upgraded to process cheaper high-sulfur heavy grades. The ability to maintain supply and fulfil forwards contracts becomes even more important.

ISAAC ANYAOGU