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OPEC sees lower 2014 crude demand growth, pumps more Cheap W. African crude may add to glut in Asia

LONDON, Aug 8, (RTRS): OPEC trimmed its 2014 global oil demand growth forecast for a second consecutive month and said the group managed to increase output in July despite violence in Iraq and Libya, pointing to more comfortable global supplies. In a monthly report on Friday, the Organization of the Petroleum Exporting Countries trimmed its projection for growth in global demand this year to 1.10 million barrels per day (bpd), down 30,000 bpd, citing weaker-than-expected US demand. “The slow and uneven global recovery continues,” OPEC said in the report. In 2014, “US oil demand remains strongly dependent on the development of the US economy, however the risk is skewed to the downside compared to the previous month.”

OPEC’s report points to even less pressure on supplies in 2015 as partly due to the US shale boom the need for OPEC crude will fall, despite faster growth in global demand. The report made no change to 2015’s global demand forecast. This year, the lower demand forecast and a higher expectation for non-OPEC supply will reduce the forecast global demand for OPEC crude to 29.61 million bpd, down 70,000 bpd from the previous estimate, OPEC said. It left next year’s forecast unchanged at 29.36 million bpd.

The report also showed OPEC’s crude output in July rose. According to secondary sources cited by the report, output increased by 170,000 bpd to 29.91 million bpd, led by higher supply in Libya and Saudi Arabia. That puts OPEC output close to the group’s target of 30 million bpd. Protests and unrest in Libya, Western sanctions on Iran and fighting in Iraq took their toll on production in earlier months, keeping OPEC output sometimes below the target.
 
Although Iraq’s northern exports have been disrupted since March, southern exports which are its main outlet to world markets have not been affected by fighting in other parts of the country. The prospect of a further rise in Libya looks uncertain given worsening fighting, say analysts.
World oil demand will rise by 1.21 million bpd in 2015, OPEC said, unchanged from last month. OPEC trimmed its forecast of next year’s growth in non-OPEC supply by about 40,000 bpd but still expects an expansion of 1.27 million bpd, with the United States leading the way.
Two other reports on global supply and demand are due next Tuesday, from the International Energy Agency which advises industrialised countries, and the US government’s Energy Information Administration.
 
Meanwhile, Asian refiners are stepping up purchases of cheap West African crude for September delivery after prices hit multi-year lows, threatening to increase a supply glut that is blunting the appetite for Asia-Pacific crude.
Weak Asian demand and high shipping costs have kept buyers away from West African cargoes in recent months, but a large backlog of oil has now pushed down prices, tempting Asian buyers back into the market, traders said.
The move will put further pressure on crude exporters Malaysia, Indonesia, Vietnam and Russia, which have already seen price differentials for their grades fall as refiners facing poor profits from processing crude into oil products such as gasoline and diesel reduce buying.
 
“West African producers are scrambling to place their crude,” said a trader with a regular Asian buyer of oil from the region. “The crude should start to move to Asia soon. 
When that happens, we’ll see downward pressure on the Asia-Pacific grades,” the trader said. An overhang of West African crude has grown as a shale boom has curbed exports to the United States, along with weak European refining margins and soft Asia demand.
Asian buyers also switched to Latin America and other regions as a global glut in crude supply caused a slide in differentials for grades from multiple regions. West African crude oil exports to Asia are expected to hit a one-year low this month.
 
However, West African crude differentials have fallen against Brent, the European benchmark, while Brent has also come off in recent weeks, making West African crude more attractive for Asian refiners relative to the Middle East.
Brent’s premium to Dubai swaps this week fell to its lowest in nearly four years.
Asian buyers are turning back to West African oil, and cargoes are selling at a faster rate for September than for the previous two months.
 
“Demand is still not great, but it came to a point where they feel it’s ok to move,” a West African crude oil trader said.
In a rare move, Taiwan’s Formosa Petrochemical last week bought a cargo of Angolan Girassol crude, which will be delivered on Oct 1-20, suggesting to some that prices may have bottomed.
“gives sellers more steel and buyers a sense that they may not be able to rely on getting a further 50 cent discount for cargoes,” a trader said.
The purchases comes as Asian producers get ready next week to start marketing barrels due to load in October. But by then, traders say, tankers carrying cheap crude from producers such as Nigeria and Angola will start arriving in Asia after their 30- to 40-day journey.
Still, some traders say that despite improving economics, high freight rates are limiting the flow to Asia.
Day rates on the largest crude tankers carrying crude from West Africa to Asia could fall further, after coming off a spike last month.
 
“The market has slipped, and there is scope for rates to fall further,” a source with a large ship owner said.
However, the longer term outlook for light sweet Nigerian oil moving to China may be limited by refinery upgrades in the world’s second-largest consumer of oil.
More modern refineries are able to take heavier, higher sulphur oil that is cheaper, taking away another source of demand for Nigerian crude, whose differentials have already fallen to their lowest in five years, with competition from US crude hammering demand.
“There’s a new world order now. I think differentials could fall to flat, or even negative,” a trader said, referring to Nigeria’s benchmark Qua Iboe crude, which is currently at around 80 cents above dated Brent, it’s lowest since 2009.

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