November 16, 2012 / 2:11 PM / 7 years ago

Light crude surplus spins world oil trade compass

* Europe to face light oil surplus like the U.S. market

* Output to grow in Kazakhstan, Libya

* Nigerian, Algerian, Azeri budget revenues to suffer

* Traders to scramble to ship extra barrels to Asia

* Markets to face shortage of once abundant heavy oil

By Dmitry Zhdannikov and Julia Payne

LONDON, Nov 16 (Reuters) - The world is increasingly saturated with hitherto scarce high-quality light crude with Europe’s market to join the United States in a surplus, traders say, predicting a scramble to export to Asia and a global shortage of once abundant heavy oil.

The shale oil boom has pushed U.S. production to the highest in more than 15 years and sharply cut its appetite for oil from Nigeria or Algeria as most of its domestically produced barrels are similarly light and low-sulphur, or sweet.

Now, it is Europe’s turn to feel the same impact even without a U.S.-style shale boom.

Trading executives say the surplus in Europe’s Mediterranean market is building up. Kazakhstan is due to deliver a long-awaited leap in its mostly light production next year and Azerbaijan is due to stabilise its output of super light oil.

This will aggravate the rivalry with comparable quality crude from Algeria, the North Sea and Africa, which no longer flow to the United States and can count on only Asia as an alternative market.

“In the past, when OPEC was cutting production by half a million barrels, everyone was jumping up and down. Today no one cares as we have a real surplus of oil,” said the head of Azeri state oil firm Socar’s trading arm, Valery Golovushkin.

“There is already plenty of oil in the Mediterranean. We at Socar are relying on long-term supply contract to Asia. But quite honestly we don’t feel any particular joy from taking it to Asia and wasting money on freight,” said Golovushkin, a veteran of the Soviet oil export industry.

Kazakhstan is due to boost its CPC Blend light oil exports by a fifth next year to around 800,000 barrels per day and double it to 1.3 million bpd in the next few years as it taps new fields and launches a pipeline via Russia to the Black Sea.

Azeri Light oil exports are expected to stabilise at 700,000 bpd next year as a BP-led consortium is fighting a decline of the previous years. Libya also aims to beat its pre-war output levels. Overall additions of light oil output in Europe could amount to 1 million bpd in the next 5 years.

Those developments will make rival producers, such as Nigeria or Algeria, suffer even more after being already hit by a U.S. import drought. All light oil producers will likely see lower budget revenues as premiums will fall.

Libya was forced to postpone talks with buyers about volumes and prices for next year even after including more Asian firms and trading houses over the past year, traders said.

“The trading world is pretty tough... Obviously the new trend of effectively less imports going into the United States is not great news,” Ian Taylor, the head of the world’s biggest oil trader Vitol, told the Oil & Money conference.

“Where does Nigerian light oil exactly go in the next 4-5 years is a big question,” Taylor said.

Golovushkin said that extra crude from Kazakhstan will further depress the market of light oil grades next year.

The International Energy Agency (IEA) sees a very strong growth in natural gas liquids and light oil across the globe until 2020 and only then production of heavy crude from sands will start catching up.


The U.S. shale oil revolution overthrew a long-held market belief that the world fated to be short of high-quality oil for decades to come while heavy cheaper oil would be abundant.

The rapid demise of that view left refiners wondering how to adjust their plants, which had been upgraded to take more heavy and less light oil to produce the biggest amount of value-added products - diesel or gasoline.

“Everyone in the Mediterranean has made the same mistake and invested in processing capacity for heavy oil. It turned out we are short of heavy oil. Iraq will of course change that but it will take years,” said Golovushkin referring to Iraq’s plans to at least double output of its mostly heavy oil.

There are still few signs of a global scramble for heavy oil other than slightly narrower than usual price spreads between light barrels such as Azeri and heavy such Russian Urals.

Traders say the main reason for this was a weak global economy, which depresses demand for oil, and record exports from Saudi Arabia which had helped compensate for a plunge in Iranian oil exports due to Western sanctions.

Iraq is, for example, struggling to find buyers for its 2013 oil output as refiners in Asia, Europe and the United States complain of high prices and variable quality.

That could, however, change quite quickly.

“This year, we have seen a lot of additional OPEC production which has counterbalanced the impact of the light sweet oil. But next year the heavy barrels might be missing massively,” said David Wech from JBC Energy consultancy.

Taylor from Vitol also anticipated a shortage.

“It is wonderful they (United States) have found all this crude but it is very light and they’re going to need some heavy stuff for all those cokers on the U.S. Gulf coast. They haven’t quite cracked that one yet,” said Taylor.

Meanwhile, the hopes of traders that Asia has the capacity to pick up all unwanted light barrels could be short-lived.

Some grades such as Kazakhstan’s CPC Blend, which has a high level of poisonous mercaptan sulphur which has to be processed, might struggle to find the market and be heavily discounted.

“There is a limit to what Asia can take unless you have got one of those shiny new refineries,” said one trader referring to new sophisticated Indian and Chinese plants. (Additional reporting by Emma Farge and Alice Baghdjian, writing by Dmitry Zhdannikov, editing by William Hardy)

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