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The big question in the market once the US imposed sanctions
against Venezuela earlier in 2019 has been "then who?". This refers
to the importer(s) that could step in and fill the gap of flows
primarily to the US, then China and India, especially as China's
appetite for additional crude supply remains quite strong, in
contrast to the US. OPEC would be the first response, especially
since flows to the US are set to further decline, but as the cartel
agreed to reduce its output and keep its shipments around 23 Mn
bpd, much lower than the levels last seen in October 2018.
This means that China must think out of the box, relying on
smaller but still significant producers around the world. In terms
of grades that could replace Venezuela, some of the countries
nearby could be an easier option for them. Imports from Brazil have
recently surged, with several Chinese refiners rushing to import
heavier grades of crude from Brazil. Petrobras reported that China
absorbed two thirds of their crude exports in 2018.
According to recent data provided by IHS Markit's Commodities at Sea, Brazil
exported more than half a million barrels directly to China during
this year's first quarter, with the volumes reaching around 660,000
barrels if we include shipments to Singapore and other destinations
across Southeast Asia that were later re-exported to China. The
increase year-on-year is estimated to have reached almost 50% so
far. Bearing in mind that Brazilian output is expected to further
increase, by around a third to a million barrels by the end of this
year, we could expect flows to China to strengthen much more in the
second half of 2019. However, we should also consider how popular
the country's Lula grade has been among other importers including
the US, especially after the sanctions against Venezuelan
barrels.
Petrobras started exporting Buzios, a new grade of crude oil,
since the last quarter of 2018. This grade has been produced since
April 2018, in the pre-salt region of the Santos Basin. Local
capacity to process Buzios is expected to reach 750,000 barrels of
oil by 2021. This is a medium heavy crude, with an API gravity of
around 28.4 degrees and with sulfur content around 0.31%.
Brazil seems to be a very good match for China, whose refinery
capacity is expected to increase significantly by the end of 2019
and obviously cannot rely on crude production from the Middle East.
This development could prove beneficial for VLCCs positioned in the
Atlantic. The crisis in Venezuela has been working in favour of
Brazil, particularly as the country manages to increase its market
share with Chinese demand. China seems to have significantly less
options available for now, especially as the US keeps an eye on
Brazilian output to fill any domestic gaps.
Other minor exporters in the region, like Colombia, have been
materialising gains as well, driven by the collapse of Venezuelan
exports. The market for heavy sours turning tight has supported
prices for Latin American crudes. A good example has been Colombian
heavy-sour Castilla Blend, with the discount versus ICE Brent for
future loadings narrowing significantly during the last month. The
strong demand for Castilla and Vasconia reached levels not seen
during the last six years.
However, there are market experts expressing their scepticism
around Brazil's ability to maintain its growth projections, as the
country's shipments fell in January before recovering in February
and marginally decreasing in March once again. Performance during
the last year provides us with an understanding of how volatile
Brazilian loadings can be. The addition of new platforms in the
Lula Norte area and at Buzios has been expected to support the
country's output. Brazilian production is set to reach 3.3 million
barrels by the end of the year. Brazil is one of the few non-OPEC
countries, together with the US and Canada, that could increase its
output significantly in the near-term.
Posted 12 April 2019 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, IHS Markit