Libyan blockade puts pressure on regional sweet crude market

London — As the Libyan National Army's blockade of the country's oil ports enters a second week, the urgency with which European oil traders are seeking alternatives to fill the 1 million b/d hole is growing.

Crude exports from the North African producer were expected to average 1.10 million b/d in January, according to shipping data seen by S&P Global Platts, or 92% of its total oil production.

The lost Libyan barrels are equivalent to more than a fifth of the total refinery throughput for the Mediterranean region where the crude yields large volumes of middle distillates and gasoline. In Europe, Repsol, OMV, Unipec, Saras and Eni among the regular buyers of Libya's key light, sweet crudes, which include Sharara, Es Sider, Sarir/Mesla and Amna.

With Europe's oil market price structure backwardated throughout January, Libya's customers are keen to source replacement crudes quickly, empowering sellers of light, sweet grades to demand steep premiums for their oil.

"Everyone is playing a waiting game, but someone has to give in at some point," said one trader, referring to the wide gap between bids and offers for obvious replacement grades such as Azeri Light and Algeria's Saharan Blend.

Algerian, Nigerian stand-ins

The other major light sweet crude stream loading in the Mediterranean is Algeria's Saharan Blend. But one trader said that all of the February cargoes were booked more than a week ago, before the Libyan force majeure was declared on January 18. Sonatrach, the state-owned oil and gas company recently set the official selling price for the grade at its highest level in eight years - Dated Brent plus $2.46/b. Another trader on Friday say that late February cargoes were being offered just above that level.

Some traders say distillate-rich Azeri Light crude has been offered at price levels above Dated Brent plus $6/b. The grade was assessed on Thursday at Dated Brent plus $5.70/b, equalling the level reached in mid-November when distillate cracks were strong. This is the highest premium in Platts records dating back to 2001, and it's $4/b above the level at the end of 2019.

"It's beginning to look like a similar situation to the way it was before Libyan production came back online a few of years ago [after the 2011 civil war]," said another regional oil trader, adding that two major Italian refiners would be taking five cargoes of Azeri Light each.

Another possible source of replacement light, sweet crude is Nigeria. But trading there is typically further forward than it is for Mediterranean grades and traders say that there has not been a rush of buying interest.

"Nigeria is quiet, I think people are gauging what's happening in Libya first," a third trader said, adding that the lighter grades such as Agbami and Akpo would see comparatively more support than other Nigerian grades due to their similarity to Libyan crude.

The Nigerian market has started to trade March-loading barrels, however, some more prompt February-loading cargoes were still available that could fill demand. These included February cargoes of Bonny Light, Bonga, Forcados, Qua Iboe and Akpo, according to a fourth trader.

Premiums overshadowed by coronavirus

Another oil-producing region that could serve as a natural replacement for Libya's missing barrels is the North Sea, particularly Norway's light, sweet grades such as Ekofisk, Troll, or Gullfaks.

Ekofisk was last heard trading at around a $3.3/b premium to Dated Brent while Gullfaks was heard last offered at premiums to Dated Brent of $4/b.

However, oil traders said this week that oil market sentiment is being overshadowed by concerns over the demand impact from the outbreak of the coronavirus in China.

As the virus continues to spread, S&P Global Platts Analytics expects a 200,000 b/d drop in global oil demand for the next two to three months as a result of the virus, about 15% of the expected oil demand growth in 2020.

With around a fifth of Libya's 1.1 million b/d of crude exports typically sent to Asia, light, sweet North Sea crudes could struggle to find support if Asian demand shrinks.

"I think it's particularly bearish for the North Sea given that China is a big outlet for Forties," a trader said referring to the UK's key Forties crude grade.

Italian flows

In Italy, where Eni and Saras are regular buyers of Libyan oil, the Amna and Es Sider grades made up about half of the 142,000 b/d of Libyan crude imports into the country last year, according to Italian oil association Unione Petorlifera.

These grades are close in quality to potential substitutes Azeri Light, Nigeria's Qua Iboe, Norway's Ekofisk, and Angola's Saxi Batuque. Libya's ultra-light and sweet Bu Attifel and Al Shahara blends make up a further third of Italian imports from the country. They can be substituted by Algeria's Saharan blend or Khazakstan's SPS blend, Congo's N'Kossa blend, Egypt's Western Desert, or WTI from the US, Unione Petrolifera believes.

Libya's medium sour crudes Al Jorf and Bouri could be replaced by the Russian Urals, Mars from the US, Gabon's Mandji crude, or Arabian Light from Saudi Arabia, the trade body said this week.

Including higher transport costs, however, substituting Libyan imports with the alternatives would likely cost the local refining industry some $1.3/b extra over Libyan grades, Unione Petrolifera said.