The long way around is better than any shortcut to success is the realization of the rivals of OPEC seeking to reach its most-prized oil customers.
The glut that was exacerbated by its prior strategy of keeping taps open has spawned a market structure that’s benefiting competitors in sales to Asia as the group seeks to implement a deal to limit output.
While U.S. Eagle Ford shale crude as well as Mexican oil arrived at Yeosu port in November, cargoes from Europe’s North Sea will reach South Korea in coming months, while U.S. Eagle Ford shale crude as well as Mexican oil arrived at Yeosu port in November. West Texas Intermediate from BP Plc. have been bought by Japanese and Thai refiners.
Due to a deepening market structure known as contango, where near-term supplies are cheaper than those for future months, shipments to Asia from locations farther than the Middle East are turning more attractive. Now since the value of a cargo rises as it makes the longer journey to its destination, sellers benefit from this. On the other hand, North American and European oil have been made cheaper relative to crude from OPEC nations such as the U.A.E and Qatar for buyers due to abundant output across the Atlantic Basin.
“The wider contango has given OPEC’s rivals a shot at loading up a vessel and sending oil from all corners of the globe to Asia, even if it sails for up to two months. OPEC’s fight for market share amid rebounding output from members such as Nigeria and Libya, as well as increased production from places like Russia and former Soviet Union regions, has exacerbated the market oversupply,” said Nevyn Nah, a Singapore-based analyst at industry consultant Energy Aspects Ltd.
It will take about 55 days to traverse the 15,000 nautical miles from the U.S. Gulf Coast across the Atlantic to South Korea, a month more than supplies from the Middle East, for two million barrels of oil on a Very Large Crude Carrier. Data compiled by Bloomberg show that during the time difference because of the contango, the value of crude can rise by as much as a dollar per barrel. higher shipping costs from the longer voyage are compensated by this.
Compared to cargoes for two months ahead, the value of Brent crude loading in three months is about $1 per barrel higher. According to Bloomberg calculations based on data from ship broker Howe Robinson Partners, the expense to time-charter a vessel for 30 days is lower at 80 to 85 cents per barrel.
“OPEC’s potential production cut could tighten the market in Asia. And, if you can’t get enough medium and heavy sour crude, then the best would be to look for alternatives in the Atlantic Basin,” said Ehsan Ul-Haq, an analyst at industry consultant KBC Energy Economics. He said that the Middle Eastern Dubai oil benchmark could turn costlier relative to Brent, which “in turn facilitates the flow of Atlantic Basin crude to Asia,” if the Saudi-led plan to curb supplies goes through.
Since they can receive a blend of heavy crudes from Latin America and lighter varieties from the U.S. in a single shipment, buyers Bottom of Form
in Asia-Pacific also benefit from this strategy. According to data from the International Energy Agency, accounting for more than a third of global consumption, the region will use 32.88 million barrels a day of oil this year. in 2017, daily demand is forecast to expand to 33.7 million barrels.
“There has traditionally been a regular flow of vessels moving oil from the Arabian Gulf to the U.S., as producers such as Saudi Arabia and Kuwait have term contracts to supply refineries along the U.S. Gulf coast. This makes a ready pool of vessels available when exporting U.S crude either on its own or along with Latin American grades to Asia, while serving as a viable back-haul option for ship-owners,” said Den Syahril, a Singapore-based analyst at industry consultant FGE.
(Adapted from Bloomberg)
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