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North Sea crude oil price premiums hit record on Libya war, outages

By Olivier Lejeune & Daniel Colover in London

January 5, 2012 - North Sea crude oil price values had a record year in 2011, supported by a tight supply situation in Europe and the Mediterranean basin, said traders.

Forties crude, the grade that typically sets the Dated Brent oil benchmark, averaged Dated Brent minus $0.02/b in the first quarter on lackluster demand for oil products, before rising in the second and third quarters following production issues at the Buzzard field in the North Sea. (See related chart: Dated Brent (mean $/bbl): January 4 - December 30, 2011).

The crude grade, one of the largest by production volume in the North Sea, hit a record high premium over Dated Brent of $2.15/b on September 15.

The third quarter saw a steady rise in the Forties premium that was first triggered by strong refining margins and good demand for refined products in Northwest Europe and limited crude supply from Libya, despite renewed economic fears in the eurozone, according to trading sources.

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The Forties differential was then propped up by falling production at one of the UK's largest oil fields, Buzzard in the Moray Firth Basin. The 220,000 b/d field saw several production disruptions in July and August, which caused widespread deferrals and cancellations of a number of crude cargoes.

At $0.39/b in 2011, the average Forties differential over Dated Brent is one of the highest recorded since Platts began to assess it in 2001, even if it is lower than in 2004, 2005 and 2006.

Forties Differential (mean $/bbl): January 4 - December 30, 2011

However, the higher average differentials for Forties to Dated Brent in earlier years are when the blend did not have the relatively higher sulfur and heavier density Buzzard crude stream feeding into it.

The outright price of Dated Brent, the benchmark for two-thirds of the world's crude, did not peak as high as in 2008, but at $111.41/b, 2011's was on average the highest price in history.

The outright price rose for many of the same reasons than crude premiums did -- tight supply from the North Sea, the loss of Libyan output for the greater part of the year, political unrest in the wider Middle East and ongoing geopolitical tensions between the West and Iran, one of the world's largest crude oil producers.

On the demand side, emerging economies such as India and China consumed ever higher quantities of oil, ensuring oil markets remained tight, even if oil consumption in the developed world fell.

Dated Brent (mean $/bbl): January 4 - December 30, 2011

Going into 2012, however, some of the factors that explained the record oil prices of 2011 appeared to be abating, according to traders.

Output from Libya was on the rise following the fall of Moammar Qadhafi in August. Production returned to around 1 million b/d in December and is expected to reach pre-war levels by the middle of next year.

There were also growing doubts about oil demand in the developed world following the Eurozone's inability to contain the spread of its debt crisis.

These factors, together with a warmer-than-expected start to the winter in Europe which curbed demand for gasoil, explained the relative fall of both the Dated Brent price and the main North Sea crude premiums in the fourth quarter of the year.

Forties was assessed at a premium to Dated Brent of $0.30/b on December 15, down $1.85/b from its highest level of the year.

Russian Urals crude rose to record highs on fears of an embargo from the EU on Iranian exports, another factor lending support to Forties and the North Sea crude complex with the grade sought as an alternative slate by refiners.

Another development in the North Sea market was the movement of Forties crude to Asia, particularly to South Korea around the end of the year.

This was the first time this movement happened in at least three years, trading sources said.

One reason for the resumption of arbitrage flows of Forties to South Korea was a cut in duty on imports of EU crude oil from 3% to zero into the country since July. The cutting of duty is due to a free trade agreement between the EU and South Korea.

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