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China, Japan Scramble for Oil As Sudan Shuts Fields

  • The shutdown in Sudanese oil supply could drive up already record premiums on spot crude markets as top Sudan customers China and Japan scramble for alternatives even as they weigh the impact on oil flows of international sanctions on Iran. South Sudan has shut down its oil output, estimated at around 350,000 barrels per day (bpd), as it and neighbour Sudan row over how to disentangle their oil industries, borders and debt. Before the shutdown, China imported most of that volume, bringing in around 260,000 bpd in 2011, according to Chinese customs data. That loss, in addition to cuts China has made in imports from Iran as Beijing and Tehran bicker over contract terms, has left China looking for alternatives equivalent to around 10 percent of its imports, or around 545,000 bpd.
  • "It will be a challenge to try to meet the shortfall in supply due to this sudden disruption as the overall quantity is not really that small," said Victor Shum, senior partner at oil consultancy Purvin & Gertz said. "Overall this is a tighter supply situation for Asian refiners." The regional spot market is unlikely to provide much relief because of limited availability due to a spurt in demand from Japan for power generation after a devastating earthquake crippled nuclear facilities last year. The supply disruption has added to the rally, boosting spot premiums for March to a record. It could drive prices even higher, although any rise may be tempered by refinery maintenance in the second quarter.
  • Sudan on Sunday released vessels loaded with South Sudanese oil, but has yet to agree to more exports from the terminal. The shutdown by South Sudan in protest has cut off supplies to equity holders China National Petroleum Corp (CNPC) , Malaysia's Petronas and India's Oil & Natural Gas Corp. "We expect some disruption in loading schedules with the production shutdown," an official with one of the equity holders said. "We hope for a resolution soon."
  • The heavy sweet grades, Nile and Dar Blend, produced in South Sudan are preferred in Japan for power production and by Chinese refineries. They are often blended to reduce sulphur content in fuel oil, a residue output from refining crude and mostly used for running ships, for sale to power utilities in markets such as Japan and Taiwan.

CHINA'S ALTERNATIVES

  • Overall, the Asia-Pacific region is net short of crude as output from aging fields in Indonesia and Vietnam declines and as producers divert output to meet rising domestic demand. To make up for the loss from Iran, China has already been buying extra spot crude from Russia, West Africa, Middle East and also Vietnam in January and February.

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