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COLUMN-Asia is the last bastion of strong oil prices: Campbell
04/04/2013 Email this story  |  Printable Version

(Robert Campbell is a Reuters market analyst. The views expressed are his own)

By Robert Campbell

NEW YORK, April 4 (Reuters) - Sentiment has turned negative in Western oil markets as heavy refinery turnarounds and logistical problems lead to unwanted volumes of crude oil, with no one apparently able to take them away.

Asian crude oil prices, however, have not succumbed completely to the bearishness. Dubai swaps and Oman futures, the bases of the price of much of the oil traded east of the Suez Canal, have steadily gained ground on other benchmarks, such as North Sea Brent.

The Dubai EFS, the premium Dubai swapholders have to pay to switch their position into Brent futures, has declined to its lowest level since November, making it cheaper for Asian refineries to snap up crude from Europe and Africa. (Dubai EFS graphic: http://r.reuters.com/zag27t)

Similarly, Oman futures, which hedge funds increasingly favor as a way to bet on Asian oil prices due to the opacity of the Dubai swaps market, are catching a good bid, with the forward curve strongly backwardated.

Strong Asian demand has been critical in recent weeks to supporting West African crude prices, which have held at very high levels even though supplies of other grades in northwest Europe are weighing on Brent futures.

Nigerian Qua Iboe crude <QUA-E>, for instance, has shown strength against Dated Brent this month, defying expectations that it would slip back after a strong showing in March. (Related graphic: http://r.reuters.com/heg27t)

The resilience of West African crude has perplexed some observers, who note that Asian refining margins have suffered in recent weeks because weakening naphtha prices and an overhang in diesel cargoes have driven Singapore gasoil swaps into contango.

Even more puzzling has been the seeming reluctance of Asian refiners to snap up the unwanted cargoes of Forties in the North Sea and Russian Urals in the Baltic that are putting so much pressure on Dated Brent.

The reluctance to buy in northwestern Europe seems mainly due to changes in South Korea's tax policy and lingering icy weather in the Baltic.

South Korean refiners have backed off their heavy purchases of Forties crude because new tax laws are making the consumption of duty-free European oils less attractive than before. Combined with a heavy spring turnaround schedule, the sudden drop in Korean buying of Forties has exacerbated the downward price from an already heavy European refinery maintenance season.

Urals pricing has come under similar pressure from Russian refinery maintenance. But ice in the Baltic has complicated shipping due to the limited number of tankers available to lift cargoes under such conditions. Without the shipping, the arbitrage trade cannot happen.

BARGAIN OR SUCKERS?

In both cases, Asia seems to be tentatively stepping back into the buying ring. Various companies are reportedly working on deals to resume shipments of Forties to Asia.

Tanker fixture lists show the shipping arm of French oil major Total trying to arrange a shipment to Asia or possibly the U.S. Gulf Coast by mid-month from the Hounds Point terminal where Forties loads.

On Urals, Chinese trader Unipec looks to be arranging to move 2 million barrels of the Russian grade out of the Baltic by the end of April for delivery to China.

While there is no guarantee these deals will go through, they are a sign that Asian refiners see a bargain and will buy. That ought to help clear the overhang of prompt crude cargoes weighing on Brent.

The real question on everyone's lips is: "Will it last?" Will Asia's refiners be the ones still dancing as the music is about to stop, or do they see something that the Western market is missing?

Asian refiners tend to have a longer-term perspective, given the sailing times needed to meet requirements. A Chinese refinery purchasing European oil today, for instance, will not receive it until June or July.

The resilience of Asian crude prices suggests regional traders are seeing strong demand beyond the current spring doldrums.

But there are serious questions about the strength of Asian demand for oil products. Skeptics note that naphtha prices have plunged due to weak petrochemical sales, while regional diesel markets are signaling an overhang of prompt cargoes as Chinese refiners export more of the fuel.

Similarly, Asian distillate prices have swooned against strong crude. Gasoil cracks in Asia recently hit a 10-month low amid brimming supplies triggered by weak demand from major importers like Indonesia and Chinese exports.

Yet there are hints that some of the prompt weakness in Asia is due to destocking after a first quarter of extremely strong refining margins led to overproduction.

Already gasoil prices are creeping up, and refiners are profitable, even at current levels. (Singapore gasoil crack graphic: http://r.reuters.com/wag27t)

While demand in Europe looks certain to continue to decline, North American oil consumption is stabilizing, with distillate fuels posting sales gains as revised data clears up the picture.

January monthly data released by the U.S. government during the Easter holiday showed distillate demand rising sharply to more than 4 million barrels per day, no doubt helped by continued growth in trucking volumes as well as colder weather. (U.S. distillate demand graphic: http://r.reuters.com/tag27t)

That is why oil traders ought to watch Asian markets. If they catch the cold Europe is currently suffering from, the turmoil in world oil prices will deepen.

But if what is happening in Brent is due more to short-term, local factors, then there is much less reason for pessimism. (Editing by Lisa Von Ahn)


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