Asia's thirst for oil

Asia's Thirst for 'Sweet' Oil Feeds Crude Rally

CNBC,

14 March, 2012

Duri, Cabinda and Su Tu Den. The names are far more exotic, and less known, than Brent, the oil benchmark closely watched by investors around the world. But these crude streams are at the center of a supply-demand struggle that is propelling oil prices higher.

The three varieties of crude oil, produced in Indonesia, Angola and Vietnam respectively, have are viscous and have a low sulphur content: in the jargon of the industry, they are “medium-heavy” and “sweet”. They are also in strong demand.

Though supply shortages — whether real in South Sudan, Syria, Yemen and the North Sea or feared in Iran — have been the main driving force behind rising oil prices, consumption growth is also playing a big part in the recent rally that has sent oil to $126 a barrel.

The influence of demand is particularly important in some niches of the oil market, such as medium-heavy sweet crude. Japanese utilities are buying that variety of crude and burning it directly, without first refining it, at oil-fired power plants to fill the gap left by the loss of nuclear power. All but two of Japan’s 54 atomic reactors remain idle, reducing nuclear electricity generation by roughly 90 percent.

Lawrence Eagles, head of oil research at JPMorgan, says that utilities in Japan typically only burn crudes with sulphur content below 0.1 percent due to strict environmental rules that limit the variety of crudes that can be used.

The largest utilities in Japan imported 730,000 barrels a day of fuel oil and crude for direct burn last month, up roughly 350 percent from the same month a year ago, according to data from the Federation of Electric Power Companies of Japan.

The amount imported by Japanese utilities was almost equivalent to the production of Qatar, a member of the Opec oil cartel, and that has sent crude premiums significantly higher. Cabinda oil surged earlier this month to a premium of $1.50 above Brent, the highest ever. In the decade to 2012, the crude traded at an average discount of nearly $2 to Brent.

Medium-sweet and heavy-sweet crudes account for a relatively small share of the global pool of crude supplies.

According to the World Oil and Gas Review published by Italian oil company Eni, their combined production last year reached roughly 10m b/d, or about 11 percent of global oil supply. But the Japanese buying spree is reverberating well beyond heavy-medium and sweet crude, helping to push the whole oil market higher, traders say.

Brent crude, the global benchmark, rose on Tuesday to a session high of $126.79 a barrel, nearing the post-2008 crisis of $128.40 a barrel set earlier this month.

Japan is not alone in adding to demand. Beijing is boosting oil imports as it adds refining capacity. China last month imported 5.95m b/d, a monthly record and up 18.5 percent year-on-year.

Oil consumption is also receiving an artificial boost as some countries hoard supplies as a precaution against Middle East turmoil. Seth Kleinman, oil analyst at Citigroup, says that Thailand last week asked its refiners to increase stocks from 55 days of supply to 64 days, a build of about 6m barrels of crude.

Oil traders believe that India and China are adding to their strategic petroleum reserves, too, which are small compared to the size of their imports.

Overall, oil demand is growing in spite of a still fragile global economy. While consumption is falling in western countries such as Spain, Italy and the US, it continues to push ahead in emerging nations.

The International Energy Agency has forecast global oil consumption will grow this year by 800,000 b/d, up from 700,000 b/d in 2011. “A two-speed outlook prevails — with robust oil demand growth envisaged in the non-OECD, while demand continues to fall across most of the OECD,” the IEA said in its last monthly oil market report.

In the European Union, though, the IEA is expecting consumption to fall by 340,000 b/d North American demand is forecast to drop 110,000 b/d. But growth elsewhere will more than offset that decline.

Yet the strength of global oil demand could bring the rally in oil prices to an end. Paul Hornsell, head of commodities research at Barclays Capital, says: “Oil prices are now entering a similarly dangerous zone as they did in 2008, which then led to widespread demand suppression.”