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Mediterranean sweet crude market pressure grows as Libyan blockade enters second week

Highlights

Buyers eye Algerian, Azeri, Nigerian grades

Regional freight rates slump

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.

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Shipping data for February shows Repsol, OMV, Unipec, Saras and ENI among the regular charterers of vessels from Libya, and the lost barrels are equivalent to more than a fifth of the total refinery throughput for the Mediterranean.

With stock levels low – Europe's crude market has been backwardated throughout January – Libya's customers now have to find replacement barrels quickly, empowering sellers of light, sweet grades to demand steep premiums for their oil, especially prompt barrels loading in the Mediterranean.

"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 Saharan Blend.

SAHARAN BLEND, NIGERIA

The other major light sweet crude stream loading in the Mediterranean is Algeria's Saharan Blend, but another 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.

Meanwhile, some traders say distillate-rich Azeri Light has been discussed at levels above Dated Brent plus $6/b, above the multi-year high of Dated Brent plus $5.70/b recorded in mid-November.

In the Mediterranean sweet market, "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," said another 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. The more production lags in Libya, the more positive it will be for Nigerian oil," 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.

MARCH IMPACT

Despite the speculative support, little impact has been seen on March trading, and all of the March-loading cargoes of Agbami remain available, the second trader said. "There's no shortage of oil in the Mediterranean it seems, even with Libya out," the source said.

Another oil producing region that could serve as a natural replacement for Libya's missing barrels is the North Sea, with its light, sweet Norwegian grades.

However, North Sea traders said this week that sentiment was mostly being driven by the wider bearishness stemming from the outbreak of the coronavirus.

Since the force majeure was declared in Libya, crude futures prices have weakened as concerns grow about the risk to global economic growth from the coronavirus outbreak. Since announcing the outbreak in the central Chinese city of Wuhan, Beijing has imposed quarantine restrictions on the city and extended the country's Lunar New Year public holiday.

S&P Global Platts Analytics expects a 200,000 b/d drop in oil demand for the next two to three months, reflecting roughly 15% of the expected oil demand growth in 2020.

Around a fifth of Libya's 1.1 million b/d of crude exports are typically sent to Asia.

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

North Sea's Forties could thus struggle to find support if Asian demand shrinks.

The grade has a higher sulfur content than most of the North Sea's production.

As a result, the spread between Forties and North Sea's sweet grades could widen if European refiners look north for sweet alternatives to Libyan crude, and if China's appetite for Forties dwindles.

The premium for North Sea's Ekofisk to Forties broke $2.50/b earlier in January for the first time in more than eight years.

FREIGHT RATES DIVE

The impact of Libya's canceled shipments has been most apparent on the freight market in the Mediterranean, where Suezmax and Aframax dirty tanker market segments have fallen.

S&P Global Platts last assessed the cross-Mediterranean 135,000 mt and 80,000 mt rates at $6.23/mt and $7.59/mt, respectively, down 29% and 26% from the start of the production outage and subsequent tanker loadings stoppage.

"The market is dead quiet and with Libya up in the air it is not looking good," an Aframax tanker broker said Tuesday.

All tankers on subjects/fixed for February loadings have now been canceled, according to market participants. On Tuesday, the Filikon was reported to be on subjects for a Kribi-to-Rotterdam voyage after being released from Libya by Unipec, the third ship released due to the force majeure declaration in effect, according to a shipping source.