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China's strong appetite for Brazilian crude has set off alarm bells among various producers in Oceania and the Middle East, prompting Australian and key Persian Gulf crude suppliers to slash their selling prices in an effort to remain competitive and protect their market share in Asia, market participants said Wednesday.

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Since late 2016, China saw a dramatic increase in Brazilian crude imports and the trend remained firmly intact with two Chinese state-run oil companies purchasing 5 million barrels or more of heavy sweet crude from the South American state for loading in March, according to a source with direct knowledge of the deals.

March shipping fixtures seen by S&P Global Platts also showed that PetroChina has fixed the San Jacinto to move 130,000 mt of crude oil for March loading from Brazil to China, while trading company Vitol also booked Suez Hans and Fraternity to move a combined 260,000 mt of crude for loading in the same month for the similar journey.

In addition, Shell and Repsol fixed Maran Artemis and Aquarius Voyager respectively, to move a combined total of 560,000 mt of crude for March loading from Uruguay to China, according to the latest fixtures.

Uruguay's Montevideo is a common loading destination for Brazilian offshore producers because of its proximity to several prolific oil fields like those in the nearby Santos Basin.

The source indicated that the Brazilian crude grades that the state-run Chinese companies had purchased for loading in March consisted mainly of Roncador, Marlim and Lula.


Taking the biggest brunt of the continued arbitrage flows from South America to North Asia, many of the Australian heavy sweet crude grades that are heavily dependent on Chinese demand, saw their price differentials tumble to multi-month lows.

Latest market talk indicated that Mitsui could have sold a 550,000-barrel cargo of Australian Vincent crude for loading over April 24-28 to a European trading company at a premium of around $1.50/b to Platts Dated Brent crude assessments on a FOB basis, sharply lower than the premium of around $2.80-$3.10/b heard paid for a March-loading cargo in the previous trading cycle.

Platts assessed Vincent crude at a premium of $1.75/b to Dated Brent Tuesday, the lowest differential since October 19, 2016 when it commanded a $1.55/b premium.

In comparison, Brazil's heavy sweet Roncador crude was last assessed at a discount of $4.95/b to Platts Latin American Brent Strip (PLABS), while the country's heavy sour Marlim was assessed at PLABS minus $5.25/b on Tuesday.

"Far East [and Oceania crude grades] were too expensive," said the source.


Middle Eastern producers were also taking a cautious stance in recent weeks as they stepped up efforts to curb Asia's appetite for arbitrage barrels and remain competitive amid Dubai's strength against other global benchmarks Brent and WTI.

Last week, Saudi Aramco announced surprise cuts to the OSP differentials for its Asia-bound Arab Light and Arab Medium crude for loading in April, while Abu Dhabi's Upper Zakum crude also saw its OSP differential for February lowered by 7 cents/b from the previous month.

The Brent/Dubai Exchange of Futures for Swaps spread -- a key indicator of ICE Brent's premium to benchmark cash Dubai -- has been narrowing sharply this year, making Dubai-linked Middle Eastern and Far East Russian grades less competitive against various grades linked to the European benchmark, traders said.

"Yes, it is still economical [to buy Brazilian grades]," the source said when asked about the general cost comparison between purchasing South American and Asia-Middle East crude grades including freight rates.

The source added that the narrow Brent/Dubai spread would likely keep the Brazil-Asia arbitrage window wide open as Roncador and Marlim are priced against Brent.

The second-month EFS averaged $1.51/b in February, the lowest since August 2015 when it averaged 79 cents/b, Platts data showed. The EFS averaged $1.65/b in January, $2.17/b last December and $2.11/b in November 2016.

--Gawoon Philip Vahn,

--Deborah Lee,

--Edited by Irene Tang,