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South Korean tax-free purchases of North Sea Forties crude are poised to stem the slide in prices as the supply of Western Europe’s most abundant oil jumps to the highest level in almost a year.
The flow of oil to the Asian nation will keep Forties at a premium to Dated Brent, the global benchmark grade, for the next two months, all but three of 10 traders and analysts surveyed this week by Bloomberg News said. The spread has dropped 55 percent since reaching an 11-month high on Jan. 9. Production in February will climb to 407,143 barrels a day, the most since March, a loading schedule obtained by Bloomberg News showed.
“It has become harder and harder to bet on the downside of North Sea grades,” Olivier Jakob, managing director at Zug, Switzerland-based Petromatrix GmbH, said Jan. 8 by phone. “As soon as the market weakens, it opens up the flow to Korea.”
North Sea crude is being exported at an unprecedented rate to South Korea after the nation signed a free-trade agreement with the European Union in 2011. Forties is the largest of the four grades that make up Dated Brent and, as the cheapest, typically acts as a price guide for producers from Russia to Saudi Arabia.
Forties loading in 10 to 25 days was 70 cents a barrel more expensive than Dated Brent yesterday, according to data compiled by Bloomberg. It was at a $1.55 premium on Jan. 9, the most since March 9, compared with an average of 16 cents last year.
For two of those questioned in the Bloomberg survey, the effect of exports to Korea will be neutral. A third, David Wech, the managing director at Vienna-based JBC Energy GmbH, said Forties may trade temporarily below Dated Brent.
“We expect the arbitrage to South Korea to remain viable and accordingly it will continue to support Forties,” Wech said by e-mail Jan. 15. “However, given the higher Forties loading schedules for January and February, we may see Forties return to discounts to the Dated Brent Strip in the coming weeks.”
Vitol Group, the world’s largest independent oil trader, has booked two supertankers this month to ship the crude to South Korea. The Geneva-based trader chartered the Maran Capricorn to load 270,000 metric tons on Jan. 20 from Hound Point in eastern Scotland at a cost of $6 million, satellite- tracking data compiled by IHS, an Englewood, Colorado-based researcher, show. Last week, Vitol booked the Hanjin Ras Tanura to carry about 275,000 tons on Jan. 25 from the same port at a cost of $5.95 million, according to Optima Shipbrokers Ltd. Hound Point is the loading terminal for Forties.
South Korea signed an accord in July 2011 that exempted its refineries from a 3 percent tax on imports from the EU. At least 28 tankers have been chartered to take North Sea crude to the Asian nation since last year, data compiled by Bloomberg show.
Korean purchases rose to cover cuts in purchases from Iran as the U.S. and EU tightened sanctions aimed at curbing the Islamic republic’s nuclear program. The Asian country’s imports from Iran fell to 8.36 million barrels in November, 30 percent less than a year earlier, data compiled by Bloomberg show.
Purchases from the U.K. climbed to 22.68 million barrels in the first 10 months of last year, compared with 3.06 million in all of 2011, the data show. Korea also boosted imports from Norway to 16.79 million barrels over the same period, compared with 2.1 million in the previous year.
“We can expect Korean demand for North Sea crude to go unabated as the country continues to diversify its crude sources away from Iranian crude,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said Jan. 10.
Dated Brent is derived from prices of Brent, Forties, Oseberg and Ekofisk crudes that are produced in the U.K. and Norwegian sections of the North Sea. Forties made up 41 percent of the total last year, data from loading programs for the four grades show.
Production was disrupted last year following strikes by Norwegian oil contractors and overrunning maintenance at the U.K.’s Buzzard oil field. The 200,000 barrel-a-day field, the biggest contributor to the Forties blend, was shut on Sept. 4 and scheduled to resume in mid-October. It restarted two weeks later, cutting output to as low as 154,839 barrels a day in October.
Exports of the four main grades will increase to 943,000 barrels a day next month, up from 697,000 barrels a day in October, according to loading programs, the monthly schedules of shipments compiled by field operators to allow buyers and sellers to plan their supply and trading activities.
Production will probably be more stable this year, according to BNP Paribas.
“BFOE crude supply will roughly track production levels of 2012 of around 800,000 barrels a day, for most of the year, and higher over September and October as we don’t expect a repeat of the prolonged outages of 2012 during field maintenance for that period,” Tchilinguirian said.
The output increase may also narrow the spread between the two Brent contracts nearest to expiry on the ICE Futures Exchange to about 50 cents a barrel, from more than $1, according to Commerzbank AG and BNP Paribas.
The difference peaked at $1.28 on Jan. 2, futures data show. The discount of March to February was 60 cents a barrel at 4 p.m. yesterday, before the February contract expired.
“While loadings should rise, we do expect these to materially weaken spreads at the front of the Brent curve,” Tchilinguirian said.
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