Marine-fuel sulphur legislation will support demand for Mediterranean-region light sweet crudes in 2020, when access to sour crudes will be reduced by Opec output restraints and Mideast Gulf producers' focus on Asia-Pacific sales.
The 1 January implementation of International Maritime Organisation (IMO) requirements for a 0.5pc fuel sulphur cap will underpin refiners' appetite for light-sulphur Algerian and Libyan grades. Both countries' output primarily stays in northwest Europe and the Mediterranean — around 334,000 b/d (63pc) of total Algerian Saharan Blend headed into these regions over the January-November 2019 period, as did 690,000 b/d (68pc) of Libyan crudes, according to Argus. The outcome of the country's 2020 term allocations will give an indication of how much will stay in the short-haul market.
IMO-linked demand has pushed trade levels for December Saharan Blend and flagship Libyan grade Es Sider near respective six-year and record highs at the end of 2019, although they remain below those of rival Azeri BTC Blend, which appeals more to refiners seeking to make IMO-compliant fuels.
Both of the north African countries are targeting production increases. Libya plans for a rise from 1.25-1.3mn b/d to 1.5mn b/d next year, state-owned NOC head Mustafa Sanalla said. Algeria's upper parliament has passed a long-stalled hydrocarbon law that it hopes will incentivise foreign investment and revitalise the country's flagging oil and gas sector. Argus estimates Algerian production averaged 1.03mn b/d over the January-November 2019 period.
Availability of sour crudes for Mediterranean refiners will probably dwindle in 2020. Opec and its non-Opec allies recently agreed to deepen their output cuts and as Mideast Gulf producers target customers in Asia-Pacific, European refiners are likely to feel the brunt of production declines from Saudi Arabia, Iraq and Kuwait. Already, state-controlled Saudi Aramco has agreed to increase term crude sales to China in 2020 by 151,000 b/d from the 1.67mn b/d in 2019. Trade and Iraqi sources said that 70-75pc of Iraqi Basrah crude allocations have been slated for Asia-Pacific buyers in 2020, from 71pc in the first 10 months of 2019. Just 706,000 b/d of Basrah crude headed to European buyers in that period, tracking shows.
Some new medium sour supply will come into the Mediterranean region from the giant North Sea Johan Sverdrup field, to compete with Iraqi crude. Azerbaijan state-owned Socar has purchased an initial cargo for its 200,000 b/d Aliaga refinery in Turkey.
Iraqi political upheaval could change the marketing of Kirkuk blend — a European mainstay, with 484,000 b/d remaining in the region in the January-November 2019 period. Iraqi oil minister Thamir Ghadhban said that a new budget-linked agreement obliges the semi-autonomous Kurdistan Regional Government (KRG) to hand over 250,000 b/d of Kirkuk blend to Iraqi state-owned Somo in 2020. This could entice more buyers to the grade: fear that interacting with the KRG could imperil Somo Basrah allocations had made some refiners shy away from buying Kirkuk.
Continuation of recent unrest and US sanctions policies could affect crude production in the Mediterranean region in 2020. Largely peaceful demonstrations in Algeria since February culminated in president Abdelaziz Bouteflika's resignation. Libya's political factions have battled for Tripoli since April. Demonstrations have become regular in Iraq and Iran — the former's prime minister Adel Abdul Mahdi has resigned.
The Mediterranean region has largely been stripped of US-sanctioned Iranian and Venezuelan crude, and buyers are unlikely to increase intake. Iranian crude enters the Mediterranean only to go to Syria; Venezuelan deliveries have been confined to shipments for Spain's integrated Repsol and Italian integrated Eni under crude-for-debt agreements.
By Ruxandra Iordache
