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Analysis: Thailand guards against rising Brent price with Malaysia upstream equity deal

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Analysis: Thailand guards against rising Brent price with Malaysia upstream equity deal

Highlights

PTT secures light sweet Malaysian crude amid lofty Brent premium

Light sweet crude complex expected to strengthen ahead of IMO 2020

Kimanis, Kikeh, Labuan among most expensive light sweet grades

Singapore — Thailand's ambition to expand its upstream equity stake in Malaysia will likely help insulate the Southeast Asian oil consumer against Brent price volatility, with the global light sweet crude benchmark strengthening ahead of the international marine fuel sulfur limit regulation in 2020.

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Thailand has purchased around 150,000 b/d of Southeast Asian and African low sulfur crude oil so far this year, latest data from the Customs Department show. The recent rally in Brent raised some concerns about the rising refinery feedstock import costs. Platts light sweet crude benchmark Dated Brent rallied to $73.735/b on Wednesday, close to a $20/b rise from $53.85/b assessed January 2 and marking the highest level since $75.495/b on October 31, 2018.

To get around that rising cost, Thailand's state-run PTT Exploration and Production Public Co Ltd (PTTEP) has stepped up efforts to boost its regional upstream profile, securing 129 million boe in Malaysian upstream reserves in March from Murphy Oil Corp.

In that deal, PTTEP signed a sale and purchase agreement to acquire Murphy's Malaysian oil and gas assets for $2.127 billion in an all-cash transaction. The purchase is expected to close by the end of the second quarter.

The latest deal should roughly translate to Thailand's entitlement to around 700,000-1 million barrels/month of various light sweet Malaysian crude grades including Kimanis, Kikeh and Kidurong from the second half 2019, a source at PTT's trading arm told S&P Global Platts.

The Malaysian equity barrels will likely reduce Thailand's hefty exposure to the recent uptrend in low sulfur crude benchmark prices.

The Brent/Dubai Exchange of Futures for Swaps -- a key indicator of Brent's premium to the Middle Eastern benchmark that often serves as a barometer of general strength in the international light sweet crude complex -- rallied to $2.53/b Tuesday, the highest level since October 22, 2018 when it was assessed at $2.63/b, Platts data showed.

Brent-Dubai exchange of futures for swaps

The global sweet crude complex may extend the bullish momentum as refiners increase their purchases of low sulfur grades to produce more gasoil and low sulfur fuel oil [LSFO] ahead of stricter marine fuel standards by the International Maritime Organizations that are set to kick in next year.

The EFS averaged $1.9/b for the current quarter to date, compared with 77 cents/b in Q1, Platts data showed.

A stronger EFS makes various sweet crude grades produced in Southeast Asia, Africa, the Mediterranean and North Sea that are linked to the European benchmark less economical than Dubai-linked high sulfur Persian Gulf grades.

Thailand imported 58,877 b/d of crude oil from Malaysia in March, up 34.1% from 43,912 b/d received in February, Customs data showed.

Malaysia was ranked the fourth biggest overall crude supplier to Thailand in March and it was the biggest Southeast Asian low sulfur crude supplier, with Indonesia and Brunei rounding up the top 3 sweet crude supply sources during the month.

Thailand's low sulfur crude imports in Q1

NICHE MARKET

Malaysia's flagship export crudes including Labuan, Miri, Kikeh and Kimanis are often regarded by the international trading circle as the world's most expensive light sweet grades, further supporting PTTEP's latest acquisition decision.

Kimanis crude was assessed at a premium of $5.85/b to Platts Dated Brent Wednesday, while Labuan crude rallied to a premium of $6.10/b to Platts Dated Brent, the highest level since July 2014, Platts data showed.

In addition, Malaysian grades have been consistently trading at a lofty premium to light sweet crude oil in the US, Europe and West Africa.

The spread between Labuan and WTI (MEH) averaged $7.24/b in Q1, $7.02/b in H2 2018 and $5.21/b in H1 last year. The spread between Labuan and Forties averaged $5.26/b in Q1 and $4.28/b in 2018, Platts data showed.

Platts data also showed that Kimanis was assessed at an average premium of $3.80/b to Nigeria's Bonny Light so far this year.

Malaysian crudes command lofty premiums vs US, Europe, Africa grades

TIGHT JUNE SUPPLY

Looking ahead, Asian traders are anticipating tight Malaysian crude supply in the spot market with a total of 4.8 million barrels of Kimanis crude scheduled for export in June, down 20% from May, according to the monthly loading program seen by Platts.

The shorter program is due to maintenance at Malaysia's Gumusut-Kakap field, where Kimanis crude is produced, sources with knowledge of the matter said.

Malaysia's state-owned Petronas is scheduled to load three Kimanis crude cargoes over June 10-14, June 17-21 and June 28-July 2, the program showed. ConocoPhillips has two cargoes for loading over June 7-11 and June 24-28, while Shell has two cargoes for loading over June 3-7 and June 21-25. Murphy Oil has the remaining cargo for loading over June 14-18.

Other equity holders Pertamina and Petroleum Brunei have no share of the Kimanis crude supply for June.

-- Gawoon Philip Vahn, philip.vahn@spglobal.com

-- Eric Yep, eric.yep@spglobal.com

-- Andrew Toh, andrew.toh@spglobal.com

-- Edited by Claudia Carpenter, claudia.carpenter@spglobal.com