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Global oil traders nervous as Sudan oil spat drags

Global oil traders are nervously watching a dragging dispute over compensation between Sudan and breakaway South Sudan, whose impact reaches beyond major buyer China, analysts say.

The South announced last Sunday it had nearly completed a protest shutdown of its oil production ̶ the fledgling nation’s top revenue source ̶ after talks in the Ethiopian capital Addis Ababa failed again to resolve a disagreement with Sudan over oil fees.

Khartoum admits to confiscating 1.7 million barrels of South Sudanese crude since vowing in November to take 23 percent of southern oil exports as payment in kind during the fee dispute.

The South calls this “theft.”

While Juba’s pre-shutdown daily output of about 350,000 barrels per day pales against Saudi Arabia’s more than eight million barrels, analysts say it is not insignificant.

“It’s just another factor in the geopolitical risk that’s causing the market to be nervous,” said Tony Nunan, energy risk manager at Mitsubishi Corp in Tokyo.

“The price of oil is determined by the marginal barrel, so it’s important.”

Analysts say the stoppage of oil from Sudan is particularly felt in Asia.

China receives 67 percent of Sudan's crude shipments, accounting for five percent of the country’s imports.

Japan is also vulnerable as its demand for Sudan’s medium-sweet crude, burned for power generation, has risen since last year because of nuclear power outages, Deutsche Bank said in a report on Thursday.

Malaysia, India and Indonesia are the other main buyers of Sudan’s oil.

“Asian buyers already scrambling to find alternatives to Iranian oil are now faced with the prospect of having to scramble for alternatives to Sudanese oil,” the report said.

“More broadly, the loss of Sudanese crude oil further aggravates a global market already struggling to cope with multiple threats of supply disruptions in the face of low inventories and eroded OPEC spare capacity.”

Neither Sudan nor South Sudan is a member of the Organization of the Petroleum Exporting Countries (OPEC).

Analysts see the global market impact only worsening if the Sudan dispute is protracted.

“With refiners concerned about the potential loss of Iranian crude volumes, the problems in Sudan have been cited as potentially leading to a tighter supply market in the second half of the year should the problem not be resolved,” said Tamsin Carlisle, senior editor in Dubai for energy market information provider Platts.

After decades of civil war, the South split from Sudan in July and took with it three-quarters of the country's total oil production of 470,000 barrels per day.

But landlocked and grossly underdeveloped South Sudan can only ship its oil through the north, leaving the neighbors disputing how much Juba should pay for sending its crude through the pipeline and Red Sea marine terminal.

South Sudanese President Salva Kiir accused Khartoum of stealing $815 million worth of oil since December, largely by blocking four ships in Port Sudan and preventing four others from collecting their purchases.

Last week he rejected a draft agreement which proposed the South give Khartoum $5.4 billion, to be paid by Sudan’s taking 35,000 barrels of oil per day.

Kiir said he could not sign a deal that did not address other unresolved issues as well as oil, because an incomplete agreement would guarantee future conflict.

The crisis between the two nations has become a major threat to regional peace and security, United Nations chief Ban Ki-moon said.

Because of the supply uncertainties buyers are shunning Sudanese Nile and Dar blends of crude, whose prices have fallen to their lowest levels in months, Platts said.

It added that Khartoum is offering the South Sudanese cargos at steep discounts from official prices.

“Some of the less risk-averse trading outfits... might buy the oil if offered a sufficient discount, as they know how to disguise its origin when selling it on. This may already have happened,” Carlisle said.

One industry analyst, who asked not to be named, said China might be a willing buyer but most potential purchasers would hesitate.

“You don’t want to have South Sudan come after you” disputing the ownership, the analyst said.

South Sudan warned that anyone buying its “misappropriated” oil risks legal action.

Sudan’s oil minister Awad Ahmad al-Jaz has refused to comment on whether his country sold any seized crude.

The southern oil diverted by Sudan could also be used in its refinery, analysts said.

North and South are to make another attempt to resolve their dispute in Addis Ababa on February 10.