Viewpoint: LatAm crude veers eastward

OREANDA-NEWS. July 13, 2015. Swelling domestic US crude supply is driving Latin American producers to examine trans-Atlantic arbitrage opportunities in Asia, where buying interest is rising.

Asian refiners are exiting seasonal turnarounds and seeking to diversify away from Middle East suppliers, opening the door to rising shipments of Castilla Blend and Vasconia.

Chinese state-controlled company Sinopec is planning to reduce the frequency of heavy refinery maintenance, identifying eight major refineries where it will carry out a full turnaround only every 3-5 years. PetroChina will begin testing its new 260,000 b/d Anning refinery by January 2016.

Colombian crude exporters were concerned during the second quarter over the commencement of Iraq's new Basrah Heavy exports—which introduced increased competition in June due to low formula prices that were poised to weigh on heavy Latin American alternatives. But Chinese refiners remain skeptical about the grade's quality, particularly its high sulphur content.

China accounted for only 100,000 b/d of June-loading Basrah Heavy out of the total 1.07mn b/d exported, which could be a reason behind Iraqi state-owned marketer Somo's plans to cut future loadings and focus on Basrah Light.

This leaves room for Colombia's heavy sour Castilla Blend and medium sour Vasconia shipments to increase to China, as well as to other parts of Asia such as Japan, where several refiners purchased their first Mexican crude cargoes in the first half of 2015.

India will also remain a viable destination for Latin American grades as it begins to fill its first strategic crude storage, which will hold 9.7mn bl initially, expanding to 37mn bl. The government also plans to add 1.84mn b/d of new refining capacity by March 2017, more than triple the amount brought on line in the past four years.

The Indian government expects total refining capacity to rise by 43pc to 6.15mn b/d in two years as refiners upgrade plants to run heavier grades. India has urged state refiners to reduce term purchases and shift to spot cargoes in hopes of cutting costs.

India relies on imports for around 80pc of its crude needs, importing around 3.8mn b/d. Private sector firm Reliance already purchases nearly 60pc of its crude in spot purchases from Africa and Latin America, while Latin American crudes constitute the majority of Essar Oil's crude slate.