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Asia-Pacific is close to ditching entrenched but volatile local benchmarks in favour of European bellwether Brent to price Southeast Asian crudes, as the top oil consuming region increases imports from across the globe. The move would homogenise and simplify a fragmented pricing structure in Asia, user of a third of global crude, extending Brent's influence as a cross-continent price marker beyond the 70 percent of world supplies that now use it as a reference.

It would boost transparency by putting Asian crude on a common platform with growing imports of rival Brent-linked sweet grades from the Atlantic Basin, Central Asia and Latin America. Brent may also be a stepping stone for the evolution of other markers, such as Russian ESPO Blend, some traders said. Net crude imports into Asia will need to grow almost 3 million barrels per day (bpd) by 2015, FACTS Global Energy projects. By 2012, Brent will have replaced regional benchmarks such as the Asia Petroleum Price Index (APPI) and Indonesia Crude Price (ICP), a Reuters survey of traders showed.

Local markers suffer from low liquidity due to production decline at mature fields, with prices frequently diverging from global benchmarks, traders and analysts said. Output of Malaysian light sweet benchmark Tapis has fallen to around 190,000 bpd from a peak of more than 350,000 bpd in the 1990s. Most of that is kept for refining by equity producers ExxonMobil and national oil company Petronas, leaving little for the spot market. Output of Indonesian Minas, marker for heavy sweet crudes, is estimated to have fallen to 185,000 bpd from over 400,000 bpd in the late 1990s.

In the poll of 12 traders active in the Asia-Pacific physical crude market, 11 said Brent would become the benchmark for most of the region's sweet grades. Eight traders said that would happen within two years. A switch could lift Brent futures trading volume on the ICE Exchange and boost Brent's use in the over-the-counter market.

ESPO FACTOR

Those who argue against Brent as the sole benchmark said a buffet of markers could offer refiners a better hedging tool and allow players to trade on the arbitrage between markers. "One price marker is too simple and will allow another competitor into the market," the industry source added.

That may open the door for Russia's ESPO, a growing crude stream with output set to hit 1 million bpd by 2012. That would be a high enough volume for it to be a marker, said Andrew Reed, consultant at Energy Security Analysis in the U.S. Still, ESPO's sulphur content, higher than some Asian sweet crude, may hinder its acceptance as a benchmark, he added.

Supplies of the distillate fuels rose 1 million barrels, or 0.6 percent, in the seven days ended Aug. 20 from 174.2 million a week earlier, according to the median of 18 analyst estimates before an Energy Department report tomorrow. The last time supplies were so high was January 1983, two months after the U.S. exited a recession.

Heating oil for September delivery lost 1.97 cents, or 1 percent, to $1.9357 a gallon on the New York Mercantile Exchange today, the lowest settlement since July 6. Futures have fallen 8.6 percent this year. Prices have reached their annual peak in September, October or November in four of the past six years.

Total Petroleum Stockpiles

U.S. stockpiles of oil and fuel climbed 5.3 million barrels to 1.13 billion in the week ended Aug. 13, the highest level since at least 1990, when the Energy Department began to collect weekly data. On a monthly basis, supplies are at the highest level since November 1983. “Demand has been OK this summer, but not as strong as we would usually see coming out of a recession,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

U.S. distillate-fuel consumption peaked at an average 4.96 million barrels a day in 2007, according to the Energy Department. It has averaged 3.72 million barrels a day this year, down 13 percent from the same period in 2007.

Demand rose 5.8 percent to 3.534 million barrels a day over the past four weeks from a year earlier. Distillate fuel exports surged to a record 756,000 barrels a day in May, the most recent month available, according to the Energy Department.

Crude oil fell to a six-week low as rising U.S. jobless claims and a contraction in manufacturing in the Philadelphia area bolstered concern that the economic rebound in the world’s biggest oil-consuming country is slowing.

Oil declined 1.3 percent after the Labor Department said initial jobless claims rose to the highest level since November. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009. Total U.S. petroleum inventories are at the highest level in at least 20 years, according to the Energy Department.

Crude oil for September delivery fell 99 cents to $74.43 a barrel on the New York Mercantile Exchange, the lowest settlement price since July 7. Futures are up 2.8 percent from a year ago. Brent crude oil for October settlement slipped $1.17, or 1.5 percent, to end the session at $75.30 a barrel on the ICE Futures Europe Exchange in London.

Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed. Claims exceeded all estimates of economists surveyed and compared with the median forecast of 478,000.

Roller-Coaster Ride

“Oil is tracking some other markets because we are all looking at the same economic indicators,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The market has been a roller-coaster ride, given that what oil does each day depends on economic headlines. Employment is one indicator that’s shown no positive signs.”

The Standard & Poor’s 500 Index declined 1.7 percent to 1,075.59 at 4:02 p.m. in New York, and the Dow Jones Industrial Average dropped 1.4 percent to 10,270.98. The dollar climbed to $1.2819 per euro, up 0.3 percent from yesterday, reducing the appeal of commodities as an investment.

Gasoline futures rose as U.S. equities advanced and the dollar gave up some of its gains against the euro, increasing the investment appeal of dollar- denominated commodities. Prices erased an early loss as the Standard & Poor’s 500 Index advanced 0.1 percent after slipping as much as 0.6 percent. The dollar was up 0.2 percent against the euro as of 3:47 p.m. after earlier gaining as much as 0.5 percent. Gasoline for September delivery rose 0.8 cent, or 0.4 percent, to settle at $1.9612 a gallon on the New York Mercantile Exchange. It was the second consecutive gain after five days of declines.

The Energy Department reported gasoline inventories fell 39,000 barrels last week to 223.3 million, little changed near a 14-week high as the U.S. nears the end of the summer driving season. Stockpiles have expanded 2.7 percent since June 18 and are 6.5 percent above a year earlier.The higher-demand season traditionally ends after the Labor Day holiday, which falls on Sept. 6 this year.

Demand Rises

Demand, measured by what refiners and blenders supplied to wholesalers, rose 2.4 percent to 9.46 million barrels a day. Measured on a four-week average, demand was 3.5 percent above a year earlier.

“Demand improves, but we really didn’t go down in supply,” said Sander Cohan, an analyst with Energy Security Analysis Inc in Wakefield, Massachusetts. “Refiners continue going all-out on gasoline production. We’re one week closer to the end of gasoline season and there still isn’t any indication these stocks are going to go anywhere.” Imports jumped 13 percent to an average 1.08 million barrels a day. Refiners raised rates last week by 1.9 percentage points to 90 percent of capacity.

The premium of gasoline over crude oil, or the crack spread, based on September contracts, widened about 69 cents to $6.95 a barrel.

The transformation of China into a significant exporter of gasoil or diesel has prompted worries among other regional refiners that its rising domestic output will add to an Asian glut. However, China's focus on domestic demand and the quality of its fuel will prevent the country from becoming a major competitor to export-oriented North Asian gasoil refiners in the near term.

"China's intention isn't to capture the market and displace Japan and South Korea," said Vivek Mathur, an analyst at Energy Security Analysis Inc. in Boston. "It's not their stated objective to produce low-sulfur diesel for export." New refining capacity has been a key driver in the growth of China's gasoil exports. Between January and June, China exported 2.62 million metric tons, up 22% from the same period a year earlier, government data show. In contrast, China's imports declined to 764,000 tons this year, down almost 27% from the first half of 2009.

The trend certainly is for higher exports. China's gasoil exports in 2009 totaled 4.5 million tons, up 614% compared with 2008. The exports still pale in comparison with major refiners in countries like South Korea, from where more than 8.23 million tons of gasoil was shipped overseas in the first half of 2010.

Although South Korean and Japanese refiners produce mostly 10-parts-per-million-sulfur gasoil for export to Australia, the U.S. and Europe, China mainly makes lower-quality 0.2%- and 500-ppm-sulfur gasoil for domestic use. This limits the destinations where its gasoil surplus can go, with only Vietnam and Indonesia consuming low- or mid-sulfur gasoil with any consistency.

Those two countries are predictably ranked third and fourth--after Hong Kong and Singapore, a major hub for gasoil blending--as the biggest consumers of Chinese gasoil this year. For now, China's thirst for gasoil will continue to outpace its ability to export the fuel. Chinese refineries have been producing a diesel surplus of about 170,000 barrels a day on average this year, but that amount will shrink to just 90,000 barrels a day in 2011, ESAI's Mathur says.

China's diesel inventories are falling, even as the country raises output at its refineries. China's commercial diesel stocks were down 5.6% in June from a year earlier to 8.9 million tons, according to data from Xinhua News Agency. China produced 13.45 million tons of diesel in July, up 4% compared with a year earlier, government data show.

The profit from making gasoline may slide to the lowest level in 10 months as faltering U.S. consumer growth hurts refiners that have boosted production in anticipation of an economic rebound.

Marins on gasoline, the difference between what producers pay for crude and how much they get for the refined fuel, are poised to drop as much as 75 percent in coming months, according to James Cordier, president of futures brokerage Liberty Trading Group in Tampa, Florida. Margins, or crack spreads, were $10.07 today, down 46 percent from the 15-month high of $18.77 on May 13, based on futures prices on the New York Mercantile Exchange. They reached $2.23 in September 2009.

Refiners have accelerated output by 11 percent since the end of March on forecasts of rising demand, driving stockpiles to a two-month high as of the week ended July 16, according to the EnergyDepartment. Now the profit is being eroded by declining factory production and consumer confidence at the lowest level in a year.

Profit margins and gasoline futures rose to a 2010 high in May while demand climbed to this year’s high in June, encouraging companies such as Exxon Mobil Corp. and Valero Energy Corp. to increase output. Refinery use, after dipping to a 16-month low of 77.7 percent on Jan. 29, reached 91.5 percent last week, the highest level since August 2007, Energy Department data show.

Peak Demand

Consumption peaked for the year on June 25 at 9.46 million barrels a day, according to Energy Department data. Demand, measured as the amount refiners and blenders supply to wholesalers, rose 3.9 percent in the week ended July 16.

Supplies of gasoline increased 1.1 million barrels in the week ended July 16 to 222.2 million, an 11-week high, according to the Energy Department.“Refiners have to go back to low runs or else face collapsing margins,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

Crude oil climbed for the first time in four days as U.S. equities rallied on better-than-forecast earnings and takeover offers.

Oil rose as much as 2.2 percent as the Standard & Poor’s 500 Index rebounded from the biggest drop this month after Halliburton Co. reported profit that beat estimates. Futures fell earlier today when the National Association of Home Builders/Wells Fargo confidence index dropped to 14 this month, the lowest level since April 2009, from 16 in June.

Crude oil for August delivery rose 41 cents, or 0.5 percent, to $76.42 a barrel at 1:02 p.m. on the New York Mercantile Exchange. The August contract expires tomorrow. More- active September futures increased 45 cents, or 0.6 percent, to $76.83 a barrel. Nokia Siemens Networks said it will pay $1.2 billion for wireless network assets from Motorola Inc., while buyout firm Onex Corp. and the Canada Pension Plan Investment Board are considering a 2.9 billion-pound ($4.4 billion) bid for Tomkins Plc.

The S&P 500 gained 0.3 percent to 1,068.51 at 1:06 p.m. The Dow Jones Industrial Average increased 0.4 percent to 10,136.15.

“A higher S&P is an indication that the investor outlook is improved,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Investors are following broader signals to get a handle on the future demand outlook.”

Natural gas may fall below $4 per million British thermal units if the August contract breaks below a key supporting level, according to a technical analysis by Chris Kostas, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts.

A break below the August contract’s all-time low of $4.07 per million Btu, reached on May 6, will send the futures below $4 before it expires on July 28, and gas futures will approach $3 by September, according to Kostas.

“It’s going to spell trouble for the bears if we break into a new contract low and we can go down to the lower $3” range, said Kostas. “It’ll be bearish for the August contract, the September contract and the October one.”

Natural gas for August delivery fell 3.4 cents, or 0.8 percent, to settle at $4.354 per million Btu yesterday on the New York Mercantile Exchange. The futures have declined in six of the past seven days and are down 12 percent from a month ago even as forecasts showing above-normal temperatures in the U.S. signaled stronger demand from power plants.

“It’s supposed to be hot and the trend is still bullish,” said Kostas. “But if it doesn’t hold we could move lower.”

Crude oil was little changed, retreating from a two-week high with U.S. equities after minutes from the Federal Reserve showed policy makers saying the economic outlook has “softened somewhat.”

Oil declined as the Standard & Poor’s 500 Index dropped for the first time in seven sessions. Prices rose earlier after an Energy Department report showed that inventories of crude oil declined more than expected, refineries bolstered operating rates and fuel stockpiles increased.

Crude oil for August delivery slipped 11 cents to settle at $77.04 a barrel on the New York Mercantile Exchange. Futures reached $78.15 today, the highest intraday price since June 29. Oil on the Nymex for August delivery is 41 cents a barrel lower than for September, the smallest divergence between front- month contracts since April 20.

Brent crude for August settlement increased 12 cents to end the session at $76.77 a barrel on the London-based ICE Futures Europe exchange. August Brent futures expire tomorrow. The more- active September contract slipped 7 cents to $76.66 a barrel. The S&P 500 declined 0.4 percent to 1,090.72 at 3:12 p.m. and the Dow Jones Industrial Average lost 36.53 points, or 0.4 percent, to 10,326.50. The indexes gained after the oil market settled, closing little changed.

‘Softening’ Outlook

“The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having Inventories have dropped 12 million barrels in three weeks to the lowest level since March 19. It’s the longest string of declines since December. Supplies are 7 percent above the five- year average for the period, the department said.

“On the face of it, the crude oil number looks very bullish, but on second look it’s not so worrisome,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “We still have more than 350 million barrels of oil, so stocks are by no means tight.”

On June 25, the US Congress voted overwhelmingly in favour of legislation that provides for penalties on companies supplying petrol to Iran, as well as on international banking institutions involved with suspect Iranian organisations including, but not limited to, the Islamic Revolutionary Guards.

The new law targets petrol suppliers because of Iran’s dependence on imported fuel. Despite its status as one of the world’s largest oil producers, Iran does not have sufficient refining capacity to cover its own fuel consumption.

The Iranian government responded to news of the Congressional vote in the same fashion that it did during the months of discussion leading up to the event: It loudly proclaimed that the US sanctions did not matter, partly because some companies were still willing to deliver petrol and partly because the country was taking steps to boost domestic supplies. President Mahmoud Ahmadinejad, for example, boasted on June 28 that Iran could, if necessary, achieve self sufficiency in petrol “within one week.” The following day, Farid Ameri, the managing director of the National Iranian Oil Refining and Distribution Company (NIORDC), said that the country had enough petrol in storage to last until the end of the current Iranian calendar year in March 2011. Then on June 30, Oil Minister Masoud Mirkazemi said that Tehran was not having any problems accessing world fuel markets. Iranian companies are still able to conclude contracts for petrol, take delivery of it and put it into storage, he said.

Feedstocks

According to Vivek Mathur, the lead petrochemical analyst at Energy Security Analysis, Inc. (ESAI), Iran’s approach to the matter has been problematic. “What Iran seems to be doing is using processes that maximise the production of petrol additives and, in the process, trying to obtain low-quality [petrol] by sacrificing aromatics production,” he told MEOG by e-mail.

Specifically, he said, Iran appears to have decided on diverting petrochemical feedstock – pyrolysis gas (pygas) and reformate, both of which are produced from naphtha – away from the manufacturing of benzene, toluene and xylene. This is bound to have an impact on the Iranian economy, since, as Mathur explained, these aromatics “are in demand for the manufacture of the raw materials that go into making anything from polyesters to various engineering plastics.”

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A new $27 billion pipeline transporting oil from the depths of Siberia may see Russia supplant the Organisation of Petroleum Exporting Countries as the preferred oil supplier to the world's fastest growing economic region.

"One of the long-term strategic changes is that [the pipeline] will prove a direct threat to OPEC in the big three consumer markets in Asia—China, Japan and Korea," said Andrew Reed, an analysts for Energy Security Analysis, Inc.

Until now, Far Eastern markets haven't had their own large, local source of crude. The Eastern Siberia-Pacific Ocean pipeline, known as ESPO, which began construction in 2006 after more than a decade of planning and negotiation, is already revolutionizing the way refiners do business in the region, giving them more choice and therefore bargaining power to cut deals with OPEC.

In its heyday, OPEC's tight grip on supply made developed economies cower, but it's long been losing market share to independent producers such as Russia, and former Soviet nations. The group's weaker position was underlined last year when it asked independent producers for production cuts to help prop up sagging global prices.

Reed says ESPO crude will displace Middle Eastern grades not just because of its much lower transportation costs, but also because of its quality. Most Asian refineries are technically better geared to process the lighter, sweeter ESPO crude rather than the heavier sour crude from the Middle East.

"ESPO crude is the perfect replacement for China's own declining supply," Reid said. The crude is a blend of oil from the Verkhnechonsk, Talakan and Vankor fields in Eastern Siberia. When construction is finished, the pipeline will be 4,857 kilometers in length, running from Taishet near Lake Baikal, to the Pacific Ocean port of Kozmino in Russia's Far East. Currently only the first section of the pipeline, 2,757 kilometers in length from Taishet to Skovorodino, is open, the oil finishing its journey to the coast by rail. The remaining 2,100 kilometers of the pipeline is scheduled for completion in 2012.

Russian oil production slumped during the post-Soviet Union era, but flows through ESPO are already helping revive Russia's oil production with output hitting a record high in June, above 10 million barrels a day. The first phase is ramping up to reach a capacity of 600,000 barrels a day, but 1 million barrels a day could be flowing by 2013, an amount comparable to Saudi Arabia's current exports to China. This output is eventually expected to climb to 1.6 million barrels a day by a later date.

Also of importance is a 1,000 kilometer spur of the pipeline from Skovorodino to Daqing in China, which will divert half the 600,000 barrels a day to provide 300,000 barrels-a-day dedicated supply to China, scheduled to complete end of the third quarter this year. The spur itself is a game changer for China, securing it a substantial share of Siberian oil, delivered to its doorstep. Crude oil traders say availability of a short-haul good-quality crude has already changed China's buying tactics, Clarence Chu, oil trader at Hudson Capital in Singapore said: "Resources are scarce and China definitely wants to secure as much oil as possible as their demand is growing 3-5% per annum." China "will keep buying as long as oil is at a desired price level even though they currently have ample supply. Chinese crude buying continues to provide support to global crude prices," he said.

Another casualty of the BP Plc oil spill may be the quiet shelving of a piece of boilerplate U.S. policy that has weathered eight presidencies: ending America's dependence on foreign oil. While the ambition to be self-sufficient, or nearly so, in its energy use will likely remain a long-term U.S. goal, the rising anxiety over offshore oil drilling and a raft of new regulations are almost certain to temper the pace of future production from the prolific Gulf of Mexico.

With no obvious means to quickly substitute oil imports with onshore production or alternative energy sources, the United States will likely accept an increase in its dependence on foreign crude, including an up to one-third rise in Middle Eastern imports over the next five years. That may not compel U.S. President Barack Obama to change his rhetoric, but it will likely force him to defer the date at which American motorists are no longer reliant on foreign oil -- a target that has receded further into the future under every president since Richard Nixon.

And with oil prices in OPEC's $70 to $80 a barrel sweet spot and fast-growing consumers in China and India of increasing importance, Obama can continue to decry foreign oil without fear of alienating Middle East Gulf allies, unlike in decades past. Obama met with Saudi Arabia's King Abdullah on Tuesday at the White House and oil was not a major feature of the talks, signaling the long-standing relationship between the allies.Meanwhile, U.S. oil imports in April hit 9.7 million barrels per day, the highest level in 15 months as highway travel jumped.

AFTER SIX-MONTH BAN, REGULATIONS LOOM

Oil imports actually fell last year after record prices of $147 a barrel helped lead to the recession that cut demand. But the worst ever oil spill in the United States is expected to lead to more regulations and costs for drillers operating in the Gulf of Mexico, which should keep the country highly dependent on imports for decades. Assuming a 20 percent increase in drilling costs, the United States would be importing slightly more than it does today through 2035 even if U.S. oil demand fell, according to Stephen Brown, a fellow at Resources for the Future.

Sarah Emerson, the director of Energy Security Analysis, Inc, said the disaster will help boost imports from the Middle East Gulf about a third by 2015 to 2.4 million bpd.

Those would likely come from Saudi Arabia and Iraq, the countries with the most spare capacity. Saudi Arabia alone has nearly 20 percent of the world's proved oil reserves, compared with 2.1 percent for the United States.

To boost its exports, Saudi Arabia would likely have to get approval from OPEC, which levies output quotas on its members. But that should not be a problem as the kingdom often acts as the swing producer of the group.

In the case of Iraq, U.S. lobbying would not do much good. Although internal struggles for control of oil in Iraq continue, the lifting companies are working quickly to develop the resource.

Natural gas futures show hurricane season in the Gulf of Mexico will do less damage to production than in 2005 as supplies from off shore wells decline.

Government forecasters say the current hurricane season may be the worst since that year, when storms including Katrina, which devastated New Orleans, damaged platforms and pipelines in the Gulf of Mexico and helped send gas to a record $15.78 per million British thermal units by December.

The premium of futures for delivery in September over July was almost five times higher in 2006, the first season following Katrina, than it is this year, as production moved to more reliable onshore sites. About 10 percent of U.S. gas output comes from federal waters in the Gulf, down from 17 percent five years ago, according to the Energy Department in Washington. Natural gas for July delivery rose 4.8 cents, or 1 percent, to settle at $4.804 per million British thermal units yesterday on the New York Mercantile Exchange, down 14 percent this year. Gas for delivery in September, when forecasters expect the most storms, closed at $4.895 per million Btu, a premium of 9.1 cents, or 1.9 percent to July. The premium of September over July for delivery in 2006 was 43 cents, or 6.9 percent.

Oil Market

Crude for August delivery dropped $1.50, or 1.9 percent, to $76.35 a barrel yesterday in New York. September futures were up 68 cents, or 0.9 percent, from August at $77.03. The premium of September to August in 2006 was 90 cents, or 1.3 percent.

Marketed gas production from federal tracts in the Gulf fell 700 billion cubic feet, or 22 percent, to 2.43 trillion cubic feet in 2009 from 3.13 trillion in 2005, Energy Department data show.

Output has dropped by 52 percent since 1999, when the Gulf accounted for about 25 percent of U.S. production. Marketed gas, representing supplies available for consumers, is overall output minus impurities and gas used in the production process.

Production rose 2.97 trillion cubic feet, or 16 percent, to 21.9 trillion in 2009 from 18.9 trillion in 2005, amid increased output from wells in shale formations from Texas to Pennsylvania, according to the department.

“We rely on offshore production a lot less and prices will have a hard time getting to $6,” said Chris Kostas, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Hurricanes will only have a marginal effect.”