Asia refiners brace for surge in spot oil prices

Asian oil buyers are bracing for surging prices in the spot crude market as global supplies have tightened after stringent US sanctions on producers, disruptions of Russian oil flows in Europe and maintenance at oilfields in the Atlantic Basin and Asia. Buyers have already paid a premium of $6 a barrel to benchmark Dubai quotes for Russia’s Sokol crude for July loading, the highest premium since 2014. The premium for July-loading Oman crude futures to Dubai is at $3.46 a barrel, the most for this time of year in four years. The surging premiums are the result of the confluence of several factors limiting global supply. Asian buyers were already competing with US refiners for the same pool of resources after the United States imposed sanctions on supplies from Venezuela, forcing buyers to turn to the Middle East, Africa and Latin America for replacements.

Oman prices are jumping as the US stopped granting waivers to Iranian sanctions that have curtailed exports of the so-called heavy crudes that it produces. Asia’s demand for Russian and Middle Eastern light grades such as Sokol and Murban strengthened after arbitrage supplies from the Atlantic Basin and the United States fell. Rising domestic demand from refiners has pushed premiums for US crude higher curbing exports. The contamination of Russian Urals crude on pipelines into Europe and the longer-than-expected closure of the North Sea’s Oseberg field have caused benchmark Brent’s premium to Dubai to surge above $3 a barrel, making Atlantic Basin oil more expensive for Asian buyers. Angolan crudes were already selling at all-time high premiums as exports have dropped due to field maintenance while some Nigerian production were under force majeure.


An Indian Oil refinery in Paradeep, Odisha. Asian oil buyers are bracing for surging prices in the spot crude market as global supplies have tightened after stringent US sanctions on producers, disruptions of Russian oil flows in Europe and maintenance at oilfields in the Atlantic Basin and Asia.

Cargoes of Middle East Murban crude are at premiums of about 75 cents a barrel for July loading, the most since 2015, according to Refinitiv data, while two trade sources said premiums may have risen above $1 a barrel this week. Refiners are expecting to make up the supply shortfall from Saudi Arabia, though the country is likely to keep its exports below 7mn barrels per day to avoid a price crash like the one at the end of 2018. Rising prices have pushed up costs for Asian buyers and could weigh on regional refining margins that are at their lowest in five years for this time of year.“With a tight supply side picture, Saudi Arabia is unlikely to repeat its mistakes from 2018 and with new refineries in the region ramping up, Asian refiners will need to pay up for barrels,” said Virendra Chauhan, a Singapore-based oil analyst at consultancy Energy Aspects.

“We have heavy oilfield maintenance in Norway and West Africa across May and June,” said Chauhan. “All of these factors have been compounded by the Russia contamination issue.” Several European buyers halted oil imports from Russia via the Druzhba pipeline after finding contaminants that could damage refinery equipment. In Asia, Malaysia’s Kimanis crude exports will also fall sharply in July because of field maintenance. Asian refiners are currently re-running computer programmes that determine which crude grades are economical to buy as they factor in higher spot prices, while also considering whether to trim crude throughput, said two sources at different North Asian refineries. “Refineries which are running at maximum capacities may instead run a little lower,” one of the sources said.

Meanwhile, only one Indian buyer of Iranian oil has taken up Saudi Arabia’s offer of additional oil to make up for the loss of supplies from Tehran due to US sanctions, taking an extra 2mn barrels from the Kingdom for June shipment, industry sources said. Last month, Saudi Arabia approached Indian buyers offering them additional supplies to compensate for loss of Iranian oil after the United States threatened to sanction entities buying oil from Tehran, the sources said. The United States had imposed new sanctions on Iran in November last year, but gave a six-month waiver to eight countries, including India, which allowed them to import some Iranian oil. India was able to buy about 300,000 barrels per day (bpd) of Iranian oil under the waiver.

But last month, Washington ended the waivers and said buyers should stop Iranian oil purchases or face sanctions. Only state refiners – Indian Oil Corp, Bharat Petroleum Corp, Mangalore Refinery and Petrochemicals and Hindustan Petroleum Corp – accounting for about 60% of India’s 5mn bpd refining capacity had purchased oil from Iran since November. In January-April 2019 India received about 304,500 bpd Iranian oil. In June, Saudi Arabia will supply an additional 250,000 tonnes (2mn barrels) of oil to Mangalore Refinery (MRPL) on top of its normal requirement of about 320,000 barrels (about 2.5mn barrels), one of the sources familiar with the matter said. Another source said MRPL might not lift the additional Saudi oil as the refiner had declared force majeure and shut half of its plant due to water shortages. Mangalore Refinery declined to comment.

There was no immediate comment from IOC, HPCL, BPCL and Saudi Aramco. “In our system, UAE and Iraq oil turned out to be better than Saudi oil,” a source at one of the Indian refineries said. IOC, BPCL and HPCL have not placed a request for extra Saudi oil for June after the Kingdom raised official selling price for Asia, the sources said. “Saudi OSPs for June have been very strong, so Indians may have taken extra from others at competitive rates,” said Sri Paravaikkarasu, director for Asia oil at Singapore-based consultancy FGE. When Iran was under sanctions in 2012, Saudi Arabia and Iraq had raised market share in Asia. But since that time trade routes have shifted with new supplies, including from the United States, coming on to the markets.

“Saudi will have to fill some of the void left by Iran but it will not be a one to one replacement,” Paravaikkarasu said. “Indian refiners’ oil import policy is very flexible now and they are no longer relying on one or two particular producers.” Indian refiners have raised optional volumes under annual contracts with key producers as well as testing new grades and origins to make up for loss of Iranian oil. Also, US crude’s widening discount to Brent has strengthened demand for US crude exports. “India wants to diversify away from Middle East because of lots of geopolitical issues relating to the region,” Paravaikkarasu said. “The Middle East will continue to be the mainstay for Indian refiners but they would like to tap new stable areas when it comes to requirement of incremental barrels.”

Sources and photo-credits: Reuters, Gulf Times