Asian refiners expect the OPEC+ supply increase will enable key sour crude buyers in the Far East to meet their monthly requirements despite India’s demand surge, while the sharp pullback in the Platts Dubai price structure allayed concerns over Persian Gulf official selling price hikes.
Major Middle Eastern sour crude suppliers have been constantly ensuring that their Asian customers’ term supply contracts were fully met over the past few years, regardless of their production cut strategy. Still, the recent spike in Indian refiners’ demand amid tighter sanctions on Russian barrels raised some concerns among several Northeast Asian buyers over a possible supply shortage, especially in the spot market. Still, the OPEC+ supply increase would ensure there are enough cargoes to go around, according to feedstock managers at Japanese, South Korean and Thai refiners, as well as traders based in Singapore.
OPEC+ confirmed March 3 a longstanding plan to start easing voluntary production cuts from April, with the group’s Joint Ministerial Monitoring Committee set to meet shortly after the official start of easing, on April 5.
“India’s rapid shift in focus to Persian Gulf barrels from Russian oil isn’t the best trading scenario for other regular [Asian] buyers… OPEC+ output increase decision comes at the right time, and this should help bring the right supply-demand balance,” said a feedstock and logistics manager at ENEOS.
“I don’t think any refiners in this part of the world would ever complain when Middle Eastern producers say they will increase supply… India’s active purchase of Russian crude has been a ‘win-win’ for all in Asia, but if everyone competes fiercely for staple Middle Eastern crude, that’s not ideal,” said a feedstock manager at a major South Korean refiner. “OPEC+ supply increase decision is a relief for Asia, and that should somewhat cover India’s higher demand [for Middle Eastern sour crude] this year.”
How much India will import Russian crude will depend on shipping availability and the deals Indian refiners can negotiate with Middle Eastern suppliers, according to Abhishek Ranjan, South Asia oil research lead at S&P Global Commodity Insights. “There’s been some discussion about getting crude supplied on a delivered at port basis from the Middle East, which could pose risks to the Russian imports and limit the diversification, as refiners may prefer sticking with familiar Middle Eastern grades.”
Easing Dubai market structure
The biggest upside factor in OPEC+ producers’ recent supply hike decision for the Asian refining industry is the sharp retreat in Dubai market structure, which would ultimately help improve overall refining margins while easing Middle Eastern crude OSPs for Asian buyers, Singapore-based traders and feedstock managers at Thai and South Korean refiners said.
Platts, part of Commodity Insights, assessed the spread between front-month cash Dubai and same-month Dubai swap at $5.04/b on Jan. 17, the widest since $5.48/b on Oct. 11, 2022. However, the spread — widely known as the Dubai market structure — has sharply retreated since the OPEC+ supply hike announcement and was last assessed at $1.365/b on March 7.
The Dubai market structure is considered a key component in the monthly OSP calculations of major Middle Eastern producers.
“The huge spike in the Dubai market structure following the announcement on tighter Russian oil trade sanctions got many refiners worried as Middle Eastern OSPs could spike and stay elevated for a lengthy period… the OPEC+ supply hike plan should be very well received by the Asian refining community,” said a feedstock strategist at a state-run Thai refiner.
Earlier this month, Saudi Aramco cut the Asia-bound April OSP differentials for its crude grades by 30-60 cents/b.
“If the Dubai market structure settles at current low levels, the OSPs should be cut much further for May and second quarter-loading Asia-bound cargoes, which would be a big help for Asian cracks and margins,” said a feedstock manager at another South Korean refiner.
Non-Middle East diversification
Several refiners in Japan indicated that the OPEC+ supply hike decision is a boon for Asia’s fourth-biggest crude importer, which relies heavily on Middle Eastern crude. However, the nation’s dependence on Persian Gulf supplies for more than 95% of the total crude procurement is too high, and more supply diversification efforts have to be made, feedstock management sources at three Japanese refiners, including ENEOS and Taiyo Oil, said.
In January, 2.557 million b/d, or 95.6%, of Japan’s total monthly crude imports came from the Persian Gulf, the latest data from the Ministry of Economy, Trade and Industry showed.
“Middle Eastern sour crude supply and prices are often very volatile, and the Persian Gulf market is vulnerable to various geopolitical issues… it’s very important for [Japanese] refiners to set up stable supply sources outside that region like Southeast Asia and the Americas,” a feedstock management source at Taiyo Oil said.
Elsewhere, refiners in Thailand, South Korea and Taiwan indicated that US crude would continue to be a major non-Middle Eastern feedstock option.
“You never know when big Middle Eastern OPEC members would scrap the supply hike plans, especially when outright prices are looking bearish and threatening to break below $70/b,” said the feedstock strategist at the Thai refiner.
Thailand boosted US crude imports to 154,216 b/d in January, 70% higher than a year earlier, while Taiwan’s US crude intake in January jumped over twofold month over month and 3.3% year over year to 260,406 b/d. Meanwhile, Asia’s top US crude buyer, South Korea, imported 13.96 million barrels, or around 7 VLCCs in January.
Source: Platts