SINGAPORE Asia's market for condensate, an ultra-light oil, should outperform crude oil and liquefied natural gas (LNG) markets in 2017 as demand from new end-users is expected to peak just as Middle East supply should tighten.
An expected shortfall in Asian condensate supply of as much as 200,000 barrels per day (bpd) will drive a rally in prices for next year, according to industry sources and Reuters estimates based on Asian condensate splitter capacities and traditional supply volumes to the region.
The start-up of Qatar's Ras Laffan 2 and Iran's Persian Gulf Star Phase 1 condensate splitters will tighten Middle East supplies by a total of 266,000 bpd in 2017, based on their combined processing capacities.
As condensate supply dries up and demand spikes, Asian refiners are likely to turn to other light crude grades from the region and potentially even from the United States as a substitute. This surge in interest may raise prices for Asian light crudes from Indonesia, Vietnam and Malaysia at a time when Asia is becoming increasingly more dependent on imports as supply declines in those countries.
"There seems to be a market that is looking a bit tighter for condensate next year in Asia," Stale Endre Berg, senior vice-president of marketing and supply at Norway's oil major Statoil, said on Monday, citing the fall in supplies from the Middle East and a rise in Asian condensate splitter capacities.
Qatar will reduce its condensate exports by a third from January once the Ras Laffan splitter begins operating, an official at state-owned Qatar Gas said in June. The country's condensate exports are expected to drop to 480,000 bpd in 2017, from 560,000 bpd this year, according to a forecast from Asia Pacific Energy Consulting.
South Korea's Hyundai Chemical plans to start a 110,000 bpd splitter next month. While in Singapore, Jurong Aromatics Corp restarted its 100,000 bpd splitter in July. Taiwan's CPC is also due to start up its 50,000 bpd splitter in the first half of next year, traders said.
Condensate is a type of light crude oil produced in association with natural gas. Splitters are oil refining units that break down the condensate into diesel fuel and naphtha that is mainly used as a raw material to make petrochemicals like plastics.
REFINERS FOCUS ON SUPPLY
Asia refiners will be increasingly focused on finding cargoes of condensate ahead of the expected shortfall or finding alternatives to condensate.
"Condensates are what we will be talking about during this APPEC," an official from a South Korean refiner said on the sidelines of the annual oil conference in Singapore.
Refiners like South Korea's GS Caltex and Japan's Idemitsu, Cosmo and Tonen General who buy condensate for their refineries are likely to be the first end users to step away from condensates when prices spike.
"As the condensate market is getting stronger, refiners are likely to turn their interest to light crude," an official from a South Korean petrochemical producer said.
Condensate splitters who have less feedstock flexibility may turn towards alternatives like heavy naphtha or they could arbitrage condensate volumes from the west.
"U.S. condensate flows might make a comeback," a Singapore-based condensate trader said, explaining that the arbitrage window for U.S. condensate to Asia would open when premiums for Qatar's deodorized field condensate cross the $5 a barrel mark.
"You will see more pull from Asia and that pull will have to be fed from somewhere, it is natural to look at the U.S. and European condensate production," Statoil's Berg said. "Norewegian Ormen Lange and Snohvit will be the marginal barrels into that mix."
(Reporting by Mark Tay; Editing by Christian Schmollinger)