The North Sea crude market could offer the tanker market a new trade route, should proposed changes take effect. In its latest weekly report, shipbroker Gibson said that “concerns about North Sea crude production are nothing new although, changing production and export trends are reshaping the traditional structure of the North Sea oil sector. Dated Brent serves as a key benchmark for the global oil market, grades such as Brent, Forties, Oseberg, Ekofisk and Troll all contribute to its price discovery mechanism. However, as North Sea production continues to decline across these grades, there is alarm from traders that insufficient supply may occur which would reduce both market liquidity and the accuracy of contract pricing”.

According to Gibson, “production data from Argus highlights that since 2015 the combined production of these five grades has collapsed by 25% to 870,000 bpd during 2020. There is little sign of slowing declines in output in the near term due to insufficient investment, Covid-19, and persistent low oil prices relative to required breakeven levels. All of which adds to the concerns of traders over a future shortage of sweet grades to price dated Brent contracts. This leaves two solutions. The first is to include the ever-increasing volumes of sweet US crude such as WTI flowing into North West Europe (with Kpler data showing a YoY increase of 14% in this trade from 2019-2020). This would effectively create a light crude contract with delivery basis Rotterdam instead of a purely local North Sea crude contract. This was proposed by Platts but was quickly dropped after market criticism”.

The shipbroker added that “the second option is to include Equinor’s Johan Sverdrup (JS) crude, although this is potentially problematic given that JS is a medium sour grade. However, the increasing production of JS is likely to add greater momentum behind this option. Assuming production of other local grades does not increase, only JS can offset the falling British and Danish production of traditional North Sea grades to ensure sufficientliquidity in the physical aspect of dated Brent trading”.

“In fact, looking to the future one should consider the development of JS as a positive for the outlook of North Sea crude production. Output is expected to continue growing with production reaching a planned 500,000 bpd by mid-2021 and 720,000 bpd by Q4 2022 according to Equinor. Likewise, the field benefits from very low breakeven rates at $20/bbl upon completion and an attractive environmental profile due to its connection with low carbon renewable shore-based hydroelectricity”, Gibson noted.

“Flows data also suggests strong Asian demand for North Sea crude. Kpler data shows Q1 2021 saw a 76% gain in exports of JS to Asian buyers versus Q1 2020. This compares to a much smaller 29% increase in overall North Sea exports heading to Asia for the same period. The data also shows this trade is centred on VLCC tonnage, suggesting further increases in JS volumes will be beneficial for VLCC tonne miles. This is further supported as European refinery runs are unlikely to recover to prepandemic levels in turn boosting exports out of the region on larger crude carriers.All in all, it is clear the uncertainties surrounding dated Brent contracts are likely to remain, but with regional demand under pressure, long haul exports are likely to grow”, Gibson concluded.

Source: Hellenic Shipping News