Your trusted source

Mediterranean sweet crude differentials are expected to slide in September, market sources said, as an increase in crude flow from West Africa is expected to displace regional refinery demand for grades like Azeri Light and CPC Blend, according to Platts, a leading global provider of energy, petrochemicals, metals and agriculture information

Buoyed by weak demand for West African crudes from Asia and attractive freight, European refiners have picked up additional cargoes from both Nigeria and Angola in September, traders said.

Market sources estimate there has been around 1.6 million b/d of West African grades headed to Europe for September, on track for 50 million barrels for the month.

This expected inflow of crude has, in turn, displaced end-user demand for short-haul grades, contributing to recent downturns in differentials, particularly for Azeri Light.

On Wednesday, Aframax cargoes of Azerbaijan's distillate-rich crude, basis CIF Augusta, were assessed at Dated Brent plus $1.70/barrel, down from $2.30/b just two weeks ago.

"What I've seen throughout the September trading cycle, compared to August, is that [crude] supply has kept growing while [end-user] demand hasn't," a crude trader said. "I'm particularly worried by the dynamic in the East, as that market has been weak. A lot of Eastern tenders that usually take Atlantic Basin oil are now awarding for Eastern crude grades...so Europe has to absorb the bulk of those local programs."

West African crude grades, because of their proximity, have been pointing increasingly towards Europe.

"We've seen less of a demand from India," said one crude trader. Between 8-12 million barrels per month usually heads to India in tenders but refiners took fewer WAF cargoes into tender in September.

For example, Mangalore Refinery and Petrochemicals Limited (MRPL) did not take WAF barrels in its most recent tender, opting for Latin American crude.

A slowdown in China, based on oversupply of products as well as poor refining margins in the country has also depressed demand for Angolan crude, which typically sees 40-50% of its monthly program going to Chinese buyers.

"My feeling is bearish, what we saw in September with Chinese demand slowing down - they bought two-thirds of Angola in August and only half the program in September," said one trader, adding that he thought European buyers would pick up the slack left in the market by China.

With fewer options than normal, most sellers are concentrating on Europe for remaining September barrels as well as the newly-released October programs for both Angola and Nigeria, said trading sources. "Nigeria has to move to Europe - as it has been doing," said one trader. "But it is a competitive market with the Med and North Sea."

Traders said the impact this extra volume is likely to have on differentials in Europe is likely to remain bearish, even as refinery margins continue to hold.

"Margins are positive and good [in Europe], but there are just too many alternatives," a crude trader said. "[Refiners] have been seeing lower and lower flat prices, which is good, but when there are so many different crude alternatives to choose from, the prices just have to go down”

The Financial Times reported a few days ago that Israel, which used to buy oil from Azerbaijan, Russia and Kazakhstan, has purchased 19 million barrels of Kurdish oil from early May to August 11, which is equivalent to a roughly 77 percent of Israeli demand.

So Israel and Europe have cut oil purchases from Azerbaijan.