Libyan oil supply risk supports Mediterranean grades

03 May 2017 11:54 Source:ICIS News

LibyaLONDON (ICIS)--Libya’s intermittent and risky crude production has offset an ample supply in the Mediterranean and supported prices for some of the light sweet oil grades in the region, particularly Azeri Light and CPC Blend.

Market expectations also indicate the grades could continue to see support. Crude grades are usual priced against Dated Brent – a benchmark assessment of the physical light crude oil located in the North Sea.

Azeri Light from Azerbaijan reached a low of Dated plus 1.10 on 10 April, but rose as high as Dated plus 2.40 on 27 April. Meanwhile Kazakhstan's main export crude oil CPC Blend stood at around Dated minus 1.30 on 10 April but reached a high of Dated less 0.85 on 27 April.

Production of the key oil grades Sharara and El Feel restarted last Thursday, which has boosted Libya’s output. However, given the higher level risk associated with Libyan crude at present and delays in production targets, it is unlikely that a restart would swiftly transpose into a correction for CPC Blend and Azeri Light pricing.

The road so far
Libya’s output recovered in Q4 2016 and January 2017 to around 700,000 bbl/day, up from September 2016’s low of 300,000 bbl/day.

Output is still a far cry from its capacity levels before the 2011 civil war at around 1.60m bbl/day, but the market appears to have re-found its trust in Libya, at least for some time.

Since the beginning of the year, a series of conflicts has hit the country, bringing production down to around 500,000 bbl/day, with force majeure having been placed on some key grades, including El Sharara, although this has since been lifted.

Richard Mallinson, a geopolitical analyst at Energy Aspects, said: “[The conflict] does shake the confidence of buyers in terms of scheduling volumes; not only do you have the disruption, but you have the threat of more disruption.”

Libyan crude is in general light and sweet, and the supply of such grades has been ample in the past month with Mallinson attributing this to a number of factors.

This includes a steady in rise in output this year from Kazakhstan’s new giant oil field Kashagan in the Caspian Sea, which started its first oil flows for exports in October.

The North Caspian Oil Company (NCOC) said it expected production to reach 370,000 bbl/day by the end of 2017. In addition, OPEC-led production cuts has mostly affected heavier, medium grades, while buying interest from Asia has dropped substantially.

Market impact
Despite strong supply, price differentials for Azeri Light and CPC have seen little downside since the start of March with support emerging in some trading sessions (see graph below).

The impact is more noticeable when compared with movements on Russia’s Urals Med, a heavier grade loading from the Black Sea port of Novorossiysk, which came under pressure in line with a healthier supply.

Algeria’s Saharan, a light grade loading from the Mediterranean port of Arzew, did follow a pattern similar to that of Azeri. But it was not as pronounced because of maintenance at Algeria’s giant Skikda refinery, which brought prices down in April and added to the supply of lighter grades to the market. Skikda has a processing capacity of around 335,000 bbl/day.

Urals Med (80) stood at Dated minus $0.95/bbl on 30 January, falling as low as Dated minus $2.25/bbl before aggressive buying interest pushed prices up at the start of April.

Meanwhile, Azeri light was assessed at Dated plus $1.25/bbl on 30 January, rising to Dated plus $2.00/bbl by mid-March, with the latest price assessment on 26 April at Dated plus $2.40/bbl. CPC Blend kept a steady level in March and April between Dated minus $1.20-1.40/bbl.

While a number of traders polled by ICIS agreed the key support for price hikes emerged from Libya’s problematic supply, bullish signals were not limited to this. The return from maintenance of European refiners and tenders from some of the major Indian refiners currently taking place also contributed.

Market expectations
Little downside potential is left for CPC Blend and Azeri Light pricing, traders say, with further support expected, given a recent drop in freight rates, which has paved way for higher profit margins.

Despite the recovery in the Libyan El Sharara key grade and increase in production, risk associated with the country has risen once again. This could make Libyan crude cheaper and other lighter risk-free grades more expensive. A market source said: “It [Libyan crude trading] will remain a risky endeavour for the foreseeable future.”

Libya actually lowered the Official Selling Price in May for the grade Brega to Dated minus $0.60/bbl, down from Dated minus $0.30/bbl in April, according to documents seen by ICIS.

The market impact of the recent events in Libya appears to be limited to the Mediterranean region. The overall impact on crude futures, which are usually sensitive to news of further supply issues, has been minimal.

Commerzbank senior analyst Carsten Fritsch said prices were still under pressure despite the ongoing supply problems in Libya. “The market got used to this kind of news after repeated disruptions in Libya in the last couple of years,” he said.

(Pictured: Libya's Ras Lanuf refinery and oil port. Source Sipa Press/REX/Shutterstock)

Focus article by Sophie Udubasceanu

By Sophie Udubasceanu