A potential decline in Mexico's exports of Isthmus crude grade in 2018 has raised alarm bells among various Northeast Asian refiners as the companies may have to shift their focus back to the Middle East for bulk of their medium sour crude oil requirements, putting the brakes on their feedstock diversification efforts.
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Crude trading and procurement managers at two South Korean refining firms holding 2017 term supply contracts with Mexico's state-run Pemex told S&P Global Platts that availability of both term and spot Isthmus barrels next year could tighten sharply due to a pickup in Mexico's own domestic requirements.
The refinery sources said the companies are bracing for a decline in Mexico's Isthmus crude exports to Asia to below 100,000 b/d in a worst case scenario next year.
In comparison, Asian trade sources indicated that Pemex's trading and marketing arm PMI has been selling on average of around 150,000-200,000 b/d of the medium sour crude to Asia so far this year.
"[Mexico's heavy sour] Maya crude exports have been slowly declining but the biggest worry is Isthmus ... we expect term and spot Isthmus supply to tighten drastically next year as Mexico fast recovers from the earthquake damages," one South Korean refiner source said.
"The recent force majeure declared on early December-loading cargoes can be taken as a precursor to much tighter supply [in 2018]," the source added.
At least two Northeast Asian refiners have confirmed their spot purchase of one Isthmus crude cargo of around 500,000-600,000 barrels each, loading in December, have been affected by Pemex's recent declaration of force majeure, sources with the direct knowledge of the matter told Platts.
One of the sources said that his company was informed by Pemex in late November about the declaration of force majeure on its Isthmus cargo due to a need to meet domestic demand.
The Northeast Asian refiner is also looking for an alternative cargo to a 500,000-barrel Isthmus crude cargo at Salina Cruz in December, possibly from Americas among other options, the source said.
Meanwhile, a source at another Northeast Asian refiner said the company was not too surprised by the latest force majeure as it had understood from explanations by Pemex that Isthmus crude exports would not be available for export when it has normal refining operations. "Isthmus was available [for export] only after an earthquake, and the limited supply of the grade would only be going back to a pre-quake situation so the trend would not change significantly," the source said.
Pemex's 330,000 b/d Salina Cruz refinery, the largest in Mexico, was shut by an earthquake on September 7, and was running at 50% of capacity on November 29 following the restart of operations after a series of large earthquakes and aftershocks.
Looking ahead, sources at two Northeast Asian refiners said they understood that Isthmus crude might not be available for sale in the spot market unless there is imbalance of the crude requirements over Mexico's domestic demand.
FOCUS BACK TO MIDDLE EAST
A number of Asian refiners have already started looking for alternatives to Mexico's Isthmus crude in the Middle East and Europe for their requirements in 2018, prompted by the recent force majeure of the medium sour grade for loadings in December.
"Hopefully not, but if Isthmus exports [to Asia] more than halves next year, that's going to seriously hurt Asia's [crude sourcing] diversification plans," said a sour crude trader at a Japanese trading firm.
The pursuit of alternatives to Isthmus may also have an impact on oil flows from North America to Asia as the medium sour grade has been a popular alternative to sour grades in the Middle East in the wake of the OPEC/non-OPEC production cut agreement, and the Mexican grade has often been co-loaded with US oil exports.
"Japanese refiners need to change crude oil configuration from Mexican [crude] to either Middle Eastern or US crude like Mars or Southern Green Canyon. Price-wise, US medium grades are higher than Middle Eastern crude currently ... so it is difficult to fix [term]," said a Northeast Asian crude trader.
"The easiest substitute [for Isthmus] would be medium sour Middle Eastern grades like Saudi Arab Light, [Abu Dhabi's] Upper Zakum and Qatar's Al-Shaheen," said a source at a refining company holding current year's term contract with Pemex.
Isthmus is a medium sour crude, with a gravity of 32-33 API and 1.8% sulfur content.
In comparison, Saudi Arab Light has a gravity of around 34 API and sulfur content of 1.8%, while Upper Zakum has a gravity of around 34 API and sulfur content of 1.89%. Al-Shaheen has higher sulfur content of around 2.37% and heavier density of around 28.03 API.
"[The price of] Middle East crude like Upper Zakum will be supported because of [the possible] lack of [this] Mexican medium [crude]. [But it also] depends on supply of Arab Light [crude] term barrels," said the Northeast Asian crude trader.
RUSSIAN URALS CRUDE OFFERS ANOTHER OPTION
Meanwhile, one of the Northeast Asian refiners hit by the latest force majeure is now looking at Russia's Urals Blend crude in addition to Upper Zakum and Qatar's Qatar Marine as a possible alternative to Isthmus crude in 2018, said a source familiar with the matter.
Urals is a medium sour crude with a gravity of around 32 API and a maximum sulfur content of 1.8%. The crude mostly loads from the Russian Black Sea port of Novorossiisk and is priced against Platts Dated Brent.
However, some traders noted that the widening Brent/Dubai benchmark spreads of late does not bode well for the Russian crude and Northeast Asian end-users may find medium sour Middle Eastern grades more competitively priced.
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 European crude complex -- jumped to $3.37/b November 28, the highest since July 4 last year when it was assessed at $3.38/b.
On a monthly basis, the EFS averaged $2.70/b in November compared with an average of $2.34/b in October and the highest since September last year when it averaged $2.91/b, Platts data showed.
A wider EFS typically makes various crude grades in the Mediterranean, North Sea, Black Sea and West Africa that are linked to the European benchmark less attractive than Dubai-linked Persian Gulf grades.
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