Several oil cargoes may be deferred to January as the threat of force majeure hangs over the market after a crack shut down the Forties supply pipeline, trading sources said Wednesday.
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The key 600,000 b/d artery, which transports one of the key blends that make up the Dated Brent pricing benchmark, is likely to remain shut. Pipeline operator Ineos said it's considering a number of repair options.
In response, crude buyers have started to look elsewhere for alternative medium-sour blends. With not many prompt oil barrels available, a scramble for cargoes has begun, said trading sources.
The shutdown pushed the physical Dated Brent benchmark to a two-and-a-half-year high of 65.165/b on Monday but prices have backtracked since then as demand for this grade has fallen. Platts Dated Brent was assessed at $64.69/b Tuesday, down $0.475/b from the previous day.
The aging Forties pipeline has a capacity of over 600,000 b/d but throughput of the key grade has averaged around 450,000 b/d this year. Forties accounts for about 40% of UK North Sea crude and is one of the five blends that make up the Dated Brent pricing benchmark.
Sources told S&P Global Platts that the last ship to load Forties crude from the Hound Point terminal since the pipeline shut will be the Front Jaguar. The vessel is currently at the main loading berth at Hound Point terminal. According to Platts trade flow software cFlow, the Front Jaguar is currently anchored and is expected to be fully loaded with oil by Thursday.
FORCE MAJEURE, DEFERRALS
Traders told Platts there was still no clarity around force majeure on exports of Forties from the Hound Point terminal, but they all said it was imminent.
The North Sea crude which is one of the most active physical crude market is likely to see a big impact if a large chunk of December cargoes are moved into the January programs and this will have a ripple effect on loadings in February too, said traders.
This has caused indecision for North Sea traders especially in terms of planning, with equity holders still figuring out which cargoes will be dropped, or deferred, from the current December loading program.
"It seems that there is confusion around the market about deferrals I think that we will see, worst case, 15 deferrals and five cargoes dropped," said an active North Sea crude trader.
Total loadings of Forties in December were scheduled to be 22 cargoes totaling to 13.2 million barrels, or 425,806 b/d, with average daily loadings down 14,194 b/d from November.
The uncertainty around exports and force majeure has left many North Sea and European crude traders clambering to source alternative crudes.
A number of equity holders are considering sending their Forties cargoes into chains early in an effort to meet pre-existing supply commitments should any cargoes be deferred from subsequent loading programs.
A "chained" cargo in the Dated Brent market is a cargo of either Brent, Forties, Oseberg or Ekofisk (BFOE) that is delivered to fulfill a 600,000-barrel short position in the Cash BFOE market. Cargoes sold this way can pass between numerous companies before they are claimed by a final buyer.
Some of the key buyers are in Asia, with South Korea and China being two dominant buyers, and they are likely to find alternative crudes from Russia and the Middle East.
But a decent chunk goes to European refiners, and demand for sour crudes like Russian Urals is expected to rise, with some strong bidding interest and strength already observed, traders said.
Two recent key European buyers of this grade have been ExxonMobil's 270,000 b/d Fawley refinery in the UK and Repsol's 270,000 b/d Bilbao refinery in Spain.
This outage has also created a strong backwardation on the crude oil forward curve which could weigh on demand, traders said.
Since the shutdown of the pipeline, the Brent-related derivatives markets have spiked with backwardation steepening in the Brent CFD, Dated-to-Frontline and ICE Brent futures markets in Tuesday trade.
"The effect of Forties structure - it is super backwardated, so anyone who wants to place a cargo in the near term is penalized - super expensive, with this change in structure. Also as a result long haul is not working," another crude trader said.
A third crude trader said he expected some weakness to could creep in from European demand as well, particularly given the backwardated Dated Brent market and lowered refinery margins in Europe.
"Given that margins are down - they've been significantly hit and we have steep backwardation - I don't see people clambering for cargoes."
The closure comes less than six weeks after Ineos completed the purchase of the pipeline, together with the Kinneil gas separation terminal, from BP for $250 million.
CRACKS IN THE SYSTEM
Ineos, in its latest statement on Wednesday continued to say that the outage would last weeks and that its engineers were continuing to assess inspection data from the small hairline crack that has developed.
"A number of repair options are currently being considered and progressed. At this stage, it is still too early to say how long the repair will take at this point but it is expected to be a matter of weeks rather than days," the company said.
Oil & Gas UK, which represents the UK offshore industry group, also said it was closely monitoring the situation with Ineos.
"The shutting down of the Forties pipeline does cause significant issues for our industry, financially, operationally and commercially - 40% of oil production is now shut in and the resulting lost production is worth around £20m per day at current oil prices to industry. We hope this can be resolved safely and as quickly as possible." Oil & Gas UK CEO Deirdre Michie said in a statement late Tuesday.