Dangote kicks off gasoline production while crude imports hit 6-month low

Executive summary

Atlantic Basin: Nigeria's Dangote refinery significantly reduced its crude imports in August, leading to its feedstock inventory hitting the lowest level since the plant began operations. While the refinery is believed to be struggling with credit issues, it has started processing gasoline and is expected to swap gasoline for crude with NNPC.

Europe and FSU: As 50% of Libyan production volumes remain offline, mainly affecting European refiners, differentials of CPC, BTC and Saharan Blend jumped to multi-month highs. However, prices could come off these elevated levels soon as recent US-led talks between the two political factions are hinting at a potential resolution of the east-west standoff in Libya.

Middle East and Asia: While the two-month delay in OPEC+ unwinding production cuts may provide short-term support, this could be countered by rising exports as domestic demand declines. Medium sour and light sour differentials have strengthened, driven by improving gasoil and naphtha cracks and reduced exports from Russia.

Atlantic Basin: Dangote kicks off gasoline production while crude imports hit 6-mth low

As the market reels from Libya’s production cuts, light sweet crude prices, particularly Mediterranean grades, have surged as refiners scramble to secure alternative supplies. Azeri BTC has jumped over $2.5/bbl in two weeks, reaching $4.65/bbl above Dated Brent, while CPC Blend and Saharan Blend have hit their highest levels since at least mid-February before a minor retreat.  On Monday, Libya’s National Oil Corp declared force majeure on its 70 kbd El Feel oilfield, marking the first such announcement since the country’s eastern government vowed to shut down all oilfields and terminals on August 26. Currently, we estimate that around 570 kbd of Libya’s production is still online but at risk of further decline. Although three oil fields—Sarir, Mesla, and Nafoura, with a combined capacity of 230 kbd—have been instructed to resume operations, this order is most likely intended to secure crude supply for the Sarir and Tobruk refineries and nearby power plants amid a nationwide fuel shortage. As of this writing, no crude shipments have departed from Libyan ports this week. Two tankers are currently docked at the Brega and Es Sider ports, awaiting crude loading.

Selected crude differentials vs Dated Brent, $/bbl

Source: Argus Media

Libya's two legislative bodies are trying to sort out the leadership crisis at the Central Bank, but it's taking time to reach a solution. The country has about 22 Mbbls of onshore crude inventories, and it’s only a matter of time before storages are depleted and crude exports come to a halt. We expect the Benghazi government to keep the production blockade in place until they achieve a satisfactory political resolution, which could take months. Until them, supply in Mediterranean region will remain tight and prices for Atlantic Basin crude will find supports.

However, prices for West African grades have yet to increase, as ample supply and reduced buying interest from Asia are offsetting concerns about the supply crunch stemming from the Libya crisis. While Angola’s Girassol managed to maintain its premium at around $2.85/bbl over Dated Brent, Congolese Djeno and Nigerian Qua Iboe have dropped by $0.6/bbl and $1.5/bbl, respectively, from their early August levels. With October-loading cargoes soon to start trading, around 10 to 15 September cargoes were still available as of last week, according to Argus Media. Angola and Congo are set to increase crude exports in October, which could further limit gains on West African crude.

In Nigeria, the 650 kbd Dangote refinery significantly cut its crude imports in August, taking in just 168 kbd—half of July's level and the lowest since February. The reason for this sudden drop in imports isn't clear, but it's likely tied to the refinery's financial struggles, even though its operational rates remain unaffected. Dangote has struggled to access dollars through the Nigerian government due to the severe dollar shortage plaguing Africa's largest economy. Kpler data showed that it took over 16 days each for three crude tankers—Sienna, Almi Voyager, and Almi Odyssey—to deliver domestic Forcados, Amenam, and Escravos crude to the Dangote refinery last month. This journey typically takes just a few days, but these tankers were stranded on the water for almost two weeks before finally reaching the refinery. Dangote had previously reported payment issues, which caused crude tankers to be stuck for over a month. As a result, the company's crude inventory drops to its lowest level since the refinery started operations in January at 4.1 Mbbls.

Dangote’s crude imports by grade, kbd

Source: Kpler

Despite this, an executive at Dangote announced earlier this week that the refinery has started processing gasoline. The plant received regulatory approval to begin its 247 kbd fluid catalytic cracker and 27 kbd alkylation units in April and May, respectively. At this stage, we believe the gasoline produced would be reformate rather than finished gasoline, and it's unlikely that Dangote will produce Euro-spec gasoline until later in Q4. The start of gasoline production is crucial because NNPC, Nigeria's sole gasoline provider, owes a substantial debt to gasoline suppliers. Supply from Dangote will replace some imports and lessen Nigeria’s demand for foreign exchange. According to Nigeria’s downstream regulator, Dangote will begin supplying gasoline to the domestic market in September, and NNPC will start selling crude to Dangote in local currency from October. The detailed plan for the crude-gasoline swap is still unclear, but it could become complicated since Nigerian crude prices are expected to rise due to disruptions in Libyan supply, while gasoline cracks remain slackened.

Europe and FSU: Resolution of Libyan supply crisis in sight, potentially returning 600 kbd

August has been a turbulent month for oil prices. While crude futures experienced a m/m decline from July, driven by upcoming seasonal maintenance in Europe and the US, news of supply disruptions in Libya boosted ICE Brent to $81.4/bbl on August 26, $2.41/bbl higher d/d. However, since then, reduced concerns over the continuity of outages and a weak economic outlook in China have pushed prices lower again, with the WoS benchmark settling at $72.7/bbl on Wednesday. In line with our predictions, OPEC+ is discussing delaying planned production increases. Initially, in June, OPEC countries that had implemented a combined 2.2 Mbd in voluntary cuts announced their decision to gradually bring back barrels between October 2024 and September 2025. Given currently weak prices, this plan may be delayed, with our projections indicating that main increases will only start from January 2025. In any case, the volume of actual production hikes should be more limited than initially planned, with our estimates only seeing some 1.05 Mbd of production return (due to some countries already exceeding quotas and the market struggling to absorb volumes).

Brent Dubai market structures, $/bbl

Source: Kpler

While the end of the summer demand season should have weighed on oil prices in September and October, an extended Libyan outage could provide counter-seasonal upside. This possibility, combined with an improving macroeconomic sentiment (Fed likely cutting interest rates and continuation of ECB rate cuts) prompted us to lift our oil price forecast the next two months.

As reported by us here, conflicts between the eastern and western factions in Libya have pressured the country’s oil supply, reducing it from the usual level of 1.2 Mbd to 980 kbd during the first three weeks of August, and to a mere 450 kbd by late August. Due to the partial return of production at Sarir, Mesla, and Nafoura to feed domestic refineries and power plants, output should now be at 570 kbd (implying that more than 50% of capacity remains offline) and is expected to stay at these levels for the rest of September. Hence, weekly exports have sharply declined, with no crude vessels departing from the ports of Es Sider, Marsa al Hariga, Ras Lanuf and Mellitah since 30 August.

Physical tightness in Europe has been reflected in market structures, with the NSD M1-M3 spread surging to €3.7/bbl in late August, compared to a July average of €2/bbl. Strength in Brent has also widened the Brent-Dubai EFS to nearly one-year highs, further worsening west-to-east arbitrage. This week, Kazakh CPC Blend differentials were priced at their highest levels since October 2023, at $3/bbl versus Dated Brent. Algeria's Saharan Blend, Libya’s main competitor, has seen differentials surge from $0.25/bbl in early August to $2.00/bbl against NSD, a six-month high, while Azeri BTC Blend has moved to $4.65/bbl, also a six-month high.

While regional crude differentials could see further upside if the Libyan outage continues, recent news hint at a potential resolution of the conflict, which could lead to the lifting of the oil blockade by the eastern-based administration. On Monday, the UN Support Mission in Libya facilitated talks between Libya’s rival governments in Tripoli, which concluded with "significant understandings." The two political factions reportedly reached an agreement to address the central bank leadership crisis, agreeing to appoint a new central bank governor and board within 30 days, with an interim board governing in the meantime. They have also requested an extension until September 9 to finalize their consultations. However, a full resolution requires the support of Libya's Presidential Council, which functions as the head of state.

If the agreement succeeds and triggers the return of crude volumes by the eastern-based administration, we could see 600 kbd of production return by mid-September. This would enable September’s monthly average to trend at 800-900 kbd, with October potentially returning to normal levels of 1.2 Mbd.

Middle East and Asia: Asian markets to stay firm despite expected rise in medium-sour shipments

Oil markets in Asia remained firm over the past week, despite signs of oversupply and sluggish demand. The medium sour complex has strengthened slightly, with the Dubai M1-M3 backwardation widening to $1.86/bbl, up from $1.34/bbl the previous week. This increase could be a delayed reaction to lower exports of medium sour grades from the Middle East and Russia in August. The spread had traded below $1/bbl for most of August, but improved gasoil cracks relative to gasoline cracks last week also contributed.

Russia’s Urals shipments fell by 108 kbd to 1.55 Mbd, driven by strong domestic demand during the summer. Export levels are now comparable to those seen in August last year. Similarly, Saudi Arabia’s exports of Arab grades declined by 100 kbd m/m in August, though shipments to Asia remained stable, while exports to the US dropped by 115 kbd. Iraq, which pledged a 90-95 kbd cut between August and October to address ytd overproduction, reduced exports by 80 kbd in August but we estimate production was only down by 30 kbd compared to June. Kurdish production, now above 320 kbd, is almost back to pre-March 2023 levels.

Seaborne Russian oil exports by grades, kbd

Source: Kpler

Conversely, Kuwait's oil exports rebounded by 106 kbd m/m, supported by a 48 kbd drawdown in onshore inventories. Iran maintained exports above 1.7 Mbd for the second consecutive month, reaching levels not seen since October 2018. Chinese imports from Iran hit a record high of 1.67 Mbd last month, surpassing the previous peak in October 2023. Venezuela's oil exports also reached a 13-month high of 711 kbd, with nearly half of these volumes destined for Asia, including China and India's Paradip and Jamnagar refineries.

OPEC+ seaborne oil exports variation in August, kbd

Source: Kpler

Despite the recent rebound in Dubai spreads, we anticipate that Aramco and regional peers will reduce their OSPs by around $0.50/bbl for October loadings. ADNOC and QatarEnergy have already reflected weaker fundamentals in their prices, cutting the pricing of Upper Zakum by $0.50/bbl from September. QatarEnergy also reduced the price of Qatar Marine by $0.35/bbl, narrowing its differential to Dubai to $0.25/bbl from $0.80/bbl last month. Similarly, spot buying of Al Shaheen crude is now priced at a $0.79/bbl premium to the Dubai swap, half of last month’s differential.

Looking ahead, the eight OPEC+ members planning to unwind voluntary production cuts in October have delayed the increase by two months, which will potentially end up boosting sentiment, although it could also be seen as a confirmation of demand weakness. This, coupled with lower OSPs for October-loadings, could spur buying from Eastern Asian refiners. The upcoming trial run at China’s 400 kbd Yulong refinery has raised hopes for stronger demand in Asia, although any net increase in Chinese runs will depend on economic activity, as Yulong could displace capacity elsewhere in Shandong. In India, the end of the monsoon season will likely increase refinery runs by 300 kbd by November, translating to higher crude purchases from Indian refiners.

However, improved sentiment from the OPEC+ decision and stronger Asian demand in Q4 could be offset by higher supplies in the short term, as Middle East crude burn decreases and Russian refinery runs fall. These factors could free up to 350 kbd for export between now and November.

The rebound in Dubai has narrowed the gap with Brent, as seen in the Brent-Dubai EFS, which decreased from $2.52/bbl a week ago to $1.89/bbl at present. Although this remains relatively high compared to the ytd average of $1.56/bbl, it is making West of Suez crude more affordable for Asian refiners. Brazilian oil production has also rebounded strongly, with FOB Tupi pricing against ICE Brent M3 dropping by $1/bbl to $2.50/bbl in the past week, potentially prompting renewed interest from East Asian refiners.

Finally, the pricing of light sour grades has benefited from Russia’s lower exports of lighter grades - exports of ESPO and Sokol fell by a combined 212 kbd m/m in August to 906 kbd and have been even weaker thus far in September and Libya’s output still being halved against a month ago, despite rumours that a breakthrough may be near. Naphtha cracks which performed relatively well also acted as a support, pushing Murban’s differential to Dubai swaps to a premium of $0.17/bbl, up from $0.02/bbl a week ago.

Murban-Dubai swaps M1 spreads (5DMA), $/bbl

Source: Argus Media

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