The shutdown in Sudanese oil supply could drive up already record premiums on spot crude markets as top Sudan customers China and Japan scramble for alternatives even as they weigh the impact on oil flows of international sanctions on Iran.    

South Sudan has shut down its oil output, estimated at around 350,000 barrels per day (bpd), as it and neighbour Sudan row over how to disentangle their oil industries, borders and debt.     

Before the shutdown, China imported most of that volume, bringing in around 260,000 bpd in 2011, according to Chinese customs data. That loss, in addition to cuts China has made in imports from Iran as Beijing and Tehran bicker over contract terms, has left China looking for alternatives equivalent to around 10 percent of its imports, or around 545,000 bpd.      

"It will be a challenge to try to meet the shortfall in supply due to this sudden disruption as the overall quantity is not really that small," said Victor Shum, senior partner at oil consultancy Purvin & Gertz said.     

"Overall this is a tighter supply situation for Asian refiners," he said.     

The regional spot market is unlikely to provide much relief because of limited availability due to a spurt in demand from Japan for power generation after a devastating earthquake crippled nuclear facilities last year.      

The supply disruption has added to the rally, boosting spot premiums for March to a record. It could drive prices even higher - although any rise may be tempered by refinery maintenance in the second quarter.     

Sudan on Sunday released vessels loaded with South Sudanese oil, but has yet to agree to more exports from the terminal.                        

The shutdown by South Sudan in protest has cut off supplies to equity holders China National Petroleum Corp (CNPC), Malaysia's Petronas and India's Oil & Natural Gas Corporation.      

"We expect some disruption in loading schedules with the production shutdown," an official with one of the equity holders said. "We hope for a resolution soon."     

The heavy sweet grades - Nile and Dar Blend - produced in South Sudan are preferred in Japan for power production and by Chinese refineries. They are often blended to reduce sulphur content in fuel oil, a residue output from refining crude and mostly used for running ships, for sale to power utilities in markets such as Japan and Taiwan.

Overall, the Asia-Pacific region is net short of crude as output from aging fields in Indonesia and Vietnam decline as producers divert output to meet rising domestic demand.        

To make up for the loss from Iran, China has already been buying extra spot crude from Russia, West Africa, Middle East and also Vietnam in January and February.          

"The disruption to crude imports from South Sudan has added to the reduction China has made in Iranian imports early in this year," Roy Jordan, London-based analyst from FACTS Global Energy said. "That means it will have to look to other exporters in the Middle East and Atlantic Basin for replacement crudes."         

China has bought 10 percent more heavy sweet Angolan crude in March, pushing spot premiums for the highly acidic and heavy sweet Dalia - similar to Sudan's Dar Blend in quality - to a premium from a discount, a trader said.     

Australian heavy sweet grades are a good substitute for Sudan, but exports typically fall during the cyclone season every first quarter. Cyclone Iggy disrupted output last week as producers shut several oil fields offshore Western Australia.

China's imports from Australia rose 42 percent in 2011 to 81,939 bpd, and gained 25 percent to 17,140 bpd from Vietnam.      

China's Unipec has increased spot imports of Russia's ESPO to three cargoes a month while it recently bought February Urals crude as the arbitrage window opened.      

Compounding problems for China is Japan's additional demand for crude. The world's third-largest oil consumer has been regularly snapping up the bulk of medium to heavy sweet crude from Vietnam and Indonesia, leaving little for the spot market.

Alternatives Japan may be looking for include Gabon's Rabi Light crude and low-sulphur fuel oil, oil economist Osamu Fujisawa said. It has already started testing Rabi Blend, importing 600,000 to 1.2 million barrels a month from July.     

Japan imported 48,847 bpd of Sudanese crude in the first 11 months of last year, up from 44,294 bpd in 2011. JX Nippon Oil & Energy and Mitsubishi Corporation are the key importers.     

Sudan is the second-largest supplier of sweet crude to Japan after Indonesia. Japan burns the oil at power plants.     

FACTS Global Energy estimates Japanese crude purchases for use at power plants will be 200,000 to 300,000 bpd in the second quarter, rising from about 150,000 bpd now.     

"Nile Blend is very popular for certain power plants in Japan as they form the baseload for thermal power generation," a trader with a Japanese firm said. "It would be tough to replace the crude as any change in quality could affect the machinery," he said.     

Asia is importing record volumes of West African oil this year, rebuilding stocks after relatively low shipments in December, Reuters calculations showed.      

A drop in Brent's premium to Dubai to below $3 a barrel widened the arbitrage window, allowing more crude to flow from the Atlantic Basin to Asia.     

"Overall, the Sudan volumes are not much in a global scale," said Natalie Roberston, an analyst at ANZ. "But they are adding to the overall sentiment in a market worried about supply disruptions." - Reuters