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FEATURE: WAF crude exporters in quandary amid fading Chinese demand

Highlights

Chinese 'teapots' favoring cheaper Iranian crude

Setback for Angola, Republic of Congo on falling Chinese demand

WAF flows to China near four-year lows

London — China, the world's largest crude importer, has started to reduce its reliance on West African oil, smitten by the lure of cheaper Iranian oil amid a backdrop of swollen inventories and higher flat prices.

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This is a huge setback for Angola and Republic of Congo, which are heavily reliant on Chinese demand, for its foreign oil revenues, trading sources said this week.

"It is almost as if China took a look at $70/b oil and the state of COVID-19 in the West and said we are not paying any longer at these elevated levels -- with a subtext that Iran is more than willing to oblige with lower prices," said a Europe-based crude oil trader. "I don't blame the Iranians...after all selling at $60/b or so is still very attractive for them no doubt and for China it is a win (economically and also a poke in the eye to the US)," he added.

Many West African crudes most of which heavy and medium sweet are staples for China's industrialized refining system, with barrels from Angola and Republic of Congo making up an integral part of the country's baseload. This crude is heavy but sweet – oil that is low in sulfur, but, when refined, yields a lot of residual fuels and some distillates.

West African crude exports to China so far this year have averaged only 1.24 million b/d, according to data intelligence firm Kpler, the lowest in four years.

This compares with 1.45 million b/d and 1.50 million b/d in 2020 and 2019 respectively. In 2016, WAF flows to China averaged 1.13 million b/d and levels have been consistently above 1 million b/d since 2015.

The fall in exports is also due to a fall in production in some of these countries, which have been exacerbated by falling upstream investment and OPEC+ cuts.

Discouraging signs

Sellers of West African crude have suffered reduced demand from Chinese refiners since the start of the year.

Refreshed import quotas for China's independent refiners provided little respite against higher outright prices, unfavorable arbitrage economics, refinery maintenance season, and brief lockdowns on the back of an uptick in coronavirus levels around the time of the Lunar New Year holiday.

Chinese refineries were in maintenance for much of March and April, which meant weaker demand. But with focus shifting to barrels that will arrive in June, expectations of a recovery are fading.

"Having underbought for three months, and with the change in market structure [from steep backwardation to mild contango] it theoretically opens the arbitrage. But at this stage with some people showing [May WAF] cargoes it seems China is muted again," a West African crude trader said.

This has also affected the values of West African crudes. Crude differentials for Republic of Congo's Djeno, a crude beloved by Chinese refiners, sunk around $2/b through the first quarter to Dated Brent minus $2/b, according S&P Global Platts data.

Enticed by cheaper oil

Sources also said that swollen oil inventories in China kept a lid of imports of some crudes.

Chinese oil inventories were at 932 million barrels at the end of March compared with 914 million barrels in end-January, according to Kpler data. Oil stockpiles in China averaged 919 million barrels and 799 million barrels in 2020 and 2019 respectively.

China's independent refiners knowns as 'teapots' have in particular reduced their appetite of African crudes, and have instead binged on Iranian barrels so far this year.

Even though Iranian oil is heavy and sour while African crude is mostly sweet, the former is much cheaper, making it more appealing in a time of higher flat prices.

Crude traders said that there were obvious reasons to favor Iranian oil: a wide spread between Brent and Dubai favored Iranian barrels which are priced against Dubai; cheaper values due to the US sanctions on Iran crude which still remain in place; and some deals were sweetened with preferential terms, such as delayed payment schedules.

Iran's oil exports to China have likewise seen an uptick, market sources say. Kpler estimates Iran will export some 896,000 b/d of crude oil and dirty petroleum products to China in March, up from 406,000 b/d in February and the highest level since April 2019.

Iran is using ship-to-ship transfers to sell its oil at ports in the Persian Gulf and parts of Southeast Asia to evade the stringent US sanctions. Iranian crude is shipped to these regions using feeder ships and then transferred to smaller vessels that do not mention Iran as their point of origin, several shipping sources have said.

Although China's refiners are not new to Iranian crude, the recent rise may well be sustained after the two countries signed a trade and security cooperation pact earlier this month.

China has also recently increased its appetite for medium gravity North Sea crudes. It imported 940,000 b/d of medium gravity crude from the North Sea in March, up from 543,000 b/d a year earlier, Kpler data showed. The bulk of this is Norway's medium sour crude Johan Sverdrup, which is proving to be very popular in China.

Swing barrels

West African oil producers have encountered some problems marketing their crudes over the past decade as this region has become the world's swing producer despite it having the geographical flexibility to sell oil east or west as demand requires.

In fact, a glut of WAF crude has been a feature of oil markets in recent years. These countries have been forced to cut prices to sell barrels, with low prices, oversupply and high stocks remaining fairly constant during this period.

Amid this backdrop, Angolan production has also fallen sharply, which is another contributing factor for the fall in import volumes.

Angola, makes up the main chunk of West African crude, that flows to China.

So far this year Angola has produced around 1.15 million b/d, its lowest in over a decade, representing a decline of 40%, or 680,000 b/d, in the past five years, according to Platts estimates.

The OPEC member's crude output has been on a steady decline in the past four years due to technical and operational problems at some fields, aggravated by a lack of upstream investment and incentives.

Nigeria, which is Africa's largest oil producer, is much reliant on China, and is very dependent of Europe and India for its oil.