As Forties Falter, the US Moves In
Dec. 14, 2017
The Forties Pipeline System suffered a major shutdown this week after running at reduced rates since December 6 as a hairline crack in the 450,000 b/d pipeline near Red Moss in Aberdeenshire worsened. The system transports around 40% of UK North Sea oil production, connecting 85 fields to the British mainland and feeding Ineo’s refinery in Grangemouth. The shutdown is expected to last for several weeks as pipeline operator Ineos stated “no less than two weeks” and will likely push the current Forties loading program into the New Year. We note that Brent crude prices found immediate support from the lack of outflows, trading up to US $65.62/bbl on Tuesday and pushing the premium to WTI to US $7.83/bbl, one of the widest points of the year; however, both benchmarks have since fallen.
The abrupt halt in crude flows is likely to push Northern European refiners to seek crude from alternative sources; however, with the Urals NWE loading schedule quiet tight this year, on the back a lower Russian exports out of the Baltic, European importers will be forced to seek additional volumes further to the South. Such volumes have potential to stem from the Mediterranean/Black Sea market where the Urals Med price is discounted to Urals NEW and ample supply from Kazakhstan is supporting export volumes; however, in our view we are likely to see more interest in West African and US crude. Another source is likely Nigerian grades, which act as a good substitute for the Forties blend; however, as this grades are both linked to Brent pricing, the higher cost may send importers West towards the US. A wide differential between Brent and WTI is likely to support more US crude exports into Europe, such as medium-sour grades like Mars.
In our view, these developments are likely to support Suezmax demand out of the US, the Black Sea and West Africa, with potential additional support for Aframaxes stemming from the Mediterranean and Black sea. Owners that manage to fix in the Americas may find slightly better rates in this market area on the back of stronger demand; however, we continue to expect that global freight rates will remain generally subdued over the winter season after peaking in December, when compared to previous years. At this time, we have seen more interest in taking West African crude on Suezmaxes; however, as this story developes we expect an uptick in US volumes.
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