U.S. Shale Boom a Boon for Asian Crude Importers
Asian oil importers will pay lower premiums for their shipments as a shale oil boom diverts more barrels from the United States to the world's biggest net oil buying region over the next few years.
While the displaced supplies will benefit buyers in Asia, home to two of the world's top three oil consumers, the news is not so good for the region's producers, for whom it spells lower profits.
Shale gas fracking, which involves injecting liquids and chemicals into underground rock formations to retrieve trapped gas, has revolutionised the energy landscape in the United States and promises to give it the sort of energy independence unimaginable a decade ago.
It is also producing low-sulphur, low-density crude, pushing increasing volumes of West African crude exports - of similar quality to U.S. shale oil - towards Asia.
The extra supply has allowed Asian refiners to negotiate a better deal for imports, cutting differentials paid for high quality sweet crude versus global benchmarks.
"More African supplies to Asia certainly call into question the premium for sweet crudes," said Vivek Mathur of U.S.-based consultancy Energy Security Analysis Inc (ESAI).
Malaysia's Tapis crude price alpha factor, a premium to Brent that determines the Tapis official selling price, plunged from a record $9.50 a barrel in April to $3.05 in September.
Refinery maintenance in Asia and lower demand from China and Japan - the world's second and third biggest oil consumers - also contributed to the drop in premium.
But the hefty $6 move in differentials in favour of buyers is an indication of what is in store for Asia as the United States boosts output and cuts imports.
Rising U.S. domestic supply has displaced about 560,000 barrels per day (bpd) of imports from West Africa, data from the U.S. government's Energy Information Administration (EIA) shows.
This is nearly half of the 1.3 million bpd shipped by Asia-Pacific's top five exporting countries - Indonesia, Malaysia, Brunei, Vietnam and Australia. West African crude shipments to Asia are set to hit a record this year.
U.S. crude and condensate output is expected to rise above 6 million bpd in 2012 for the first time in 13 years, the EIA forecasts.
The International Energy Agency sees U.S. output at around 7 million bpd by 2016, including 2 million bpd of shale oil.
Asian producers hit
But there is a downside, for Southeast Asian oil producers.
"Competition from the low sulphur imports from the West, even though they will have a relative freight disadvantage, will likely limit the scope for Asian producers to achieve the wide premiums to Brent some were able to enjoy earlier this year," said Roy Jordan, a London-based analyst at FACTS Global Energy.
The competition means Asia-Pacific producers will see lower spot crude differentials, especially for naphtha-rich grades, while also eroding the premium for Brent versus Dubai - the marker for close to 12 million bpd of high sulphur, heavy crude from the Middle East to Asia.
Asia-Pacific crude supply is also rising, as producers invest to stop a decline in output at aging fields and bring on new ones to cash in on high Brent crude prices, which have averaged above $100 a barrel in the past two years.
The sweet-sour spread <DUB-EFS-1M> could hit a low of below $2 a barrel next year from about $3.50 currently, Victor Shum, a consultant at IHS Purvin & Gertz said.
"The trend going forward is a continuing narrowing of the sweet-sour spread and we may hit bottom next year," he said.
Naphta proces to come under pressure
The increased supply of light sweet crude also mean refiners will produce more light products like naphtha, feeding Asia's demand for a fuel it is structurally short of but also capping prices of the product used to make petrochemicals.
The U.S. may also export increased volumes of petrochemicals as its plants process cheaper domestic gas, the price of which has slumped to a 10-year low on the shale-led boom.
Most crackers in Asia, however, are dependent on naphtha.
"We see a distinct possibility that Europe and perhaps also the U.S. export sizeable volumes of naphtha to Asia in the future," said David Wech of Vienna-based consultancy JBC Energy.
European and Russian volumes to key Asian importers were up by more than a fifth to 80,000-85,000 bpd range in 2011, said Mathur of ESAI.
"Naphtha prices are likely to come under pressure, depending on shale gas output. The U.S. may have a lot of naphtha but from 2014 or 2015 onwards," an Asian petrochemical maker said.