North Sea’s latest crude oil stream is out of fashion, but still in demand: Fuel for Thought

The razzle dazzle of US tight oil and new rules on marine fuels could have meant a chilly reception for the arrival of the North Sea’s Johan Sverdrup.

The medium sour crude grade could be the region’s last big production boost at a time when, especially in Europe, there has been a shift to cleaner, less-sulfurous fuels. But China, India and the US will likely welcome it with open arms.

While much of the talk of the onset of Johan Sverdrup has been around the resilience of the North Sea, with the first phase set to add 440,000 b/d by next summer and 660,000 b/d by 2023, the real story is the global appeal of the medium sour crude grade.

Johan Sverdrup has a density of 28 and sulfur level of 0.8%, which means it is of slightly inferior quality to UK’s Forties, the largest of the five grades that comprise the Dated Brent benchmark. Forties’ quality is 37.31 API gravity with a 0.54% sulfur content.

Forties is also the only one with a similar volume at 450,000 b/d with the other generally sweeter lighter grades – Brent-Ninian Blend, Oseberg, Ekofisk and Troll – producing smaller quantities and in decline.

This suggests that as volumes from Sverdrup ramp up over the coming years, the North Sea’s average crude quality will shift from light sweet toward a more medium sour mix.

“Forties and Johan Sverdrup have a lot of similarities … and both should price at export parity to Asia,” Platts Analytics’ senior crude analyst Sergio Baron said.

Increasing demand for medium sour crude grades into Asia comes at the same time US light sweet exports are pouring into Europe. With US production exceeding domestic refinery demand, and export capacity growing, the international market is the only outlet for excess US barrels.

The International Maritime Organization’s 0.5% sulfur cap on marine fuels means many European refiners are lapping up lighter sweeter crudes that generally produce a greater share of lower-sulfur products like naphtha and gasoline, with high-sulfur fuel oil cracks having plunged.

And despite yielding a similar level of gasoline to WTI Midland, Johan Sverdrup should not be considered an “IMO 2020 champion,” as it has to be blended with sweeter grades to lower its sulfur level in its fuel oil output.

Further, Johan Sverdrup may also be shunned by other parts of Asia, such as South Korean and Japanese refiners, who are less keen on medium-sulfur crude and have often taken more premium North Sea grades.

This means a buyers’ market for China, India and the US, with refineries with the sophisticated tools to process dirtier crudes.

Contrary to some views, Johan Sverdrup isn’t the wrong crude at the wrong time in the wrong place.

Like many medium sour varieties, it produces more distillates than gasoline. In terms of its distillate yield, Johan Sverdrup is similar to Russia’s Urals, ESPO, Middle Eastern Dubai, Arab Medium and Iran Heavy. But Johan Sverdrup will likely be more expensive, and it will have to travel further distances to its Asian demand hubs, which could impact arbitrage economics

Johan Sverdrup, therefore, will be helped by the OPEC and non-OPEC alliance to cut back their production to bring price stability.

Indeed, current supply outages from Iran and Venezuela along with OPEC cuts have not only impacted price levels but also price differentials between key sweet-sour benchmarks.

This comes as US shale continues its upward trajectory and is slowly being unshackled from its pipeline constraints. Platts Analytics forecasts US oil and condensate production to rise to 13.36 million b/d in 2020 and average nearly 14 million b/d in 2021.

The spread between ICE Brent and Dubai futures remains fairly narrow as the outlook for medium sour crude points to tight global supplies expected over January to March next year. This is a sign that Johan Sverdrup, like many medium sour grades, could remain popular, given the sweet-sour/light-heavy imbalance is set to widen, at least in the near-term.

Tighter Urals supply is exacerbating an already short market for medium sour barrels globally, and complex refiners will roll out the red carpet for the new Norwegian grade.

Saying that, market watchers will look to see how actual demand emerges as refiners will take a while to understand the new grade. So far, a couple of large tankers are already en route to Asia with Johan Sverdrup, while European refiners appear more hesitant. It may well be the shape of things to come.

Source: blogs.platts.com