Sep 04 2023
Asian and Persian Gulf refineries will continue to depend heavily on Middle Eastern crude grades as their staple diet, regardless of price swings and changes in key benchmark spreads, because there's a limit to how much light sweet US crude would be able to take up the refiners' crude slate, industry executives and trading sources said at the Asia Pacific Petroleum Conference 2023 organized by S&P Global Commodity Insights.
OPEC and its allies are expected to maintain the tight supply strategy for a lengthy period and aggressive output cuts led by top producing members, including Saudi Arabia, have supported benchmark crude prices and the Dubai price structure, industry executives and refinery sources said during early panel discussions and networking sessions Sept. 4.
"The [OPEC+ production cuts] have been relatively successful ... Benchmark Platts Dated Brent has been pretty stable between $72/b and $88/b for nearly a year now," said Vitol CEO Russell Hardy during a panel discussion.
"The prices are going to the point of equilibrium where sour crude economics, which should always be better than sweet economics, have sort of evened up."
"Prices have been elevated due to the OPEC+ [production cut] activities ... Saudi Arabia is clearly meeting its goal," said Ben Luckock, cohead of oil trading at commodities trading house Trafigura during a panel discussion.
Despite the production cuts, top OPEC and Middle Eastern producers have ensured their term supplies to Asian buyers remain stable. Asian refiners would look to secure base feedstock requirements from Persian Gulf suppliers, even if the rising Dubai market structure and higher Middle Eastern official selling prices could impact refining margins, executives and delegates said.
Major Middle Eastern OPEC members may have led the production cuts but they have respected Asia's demand and monthly term lifting allocations have not been reduced, delegates of an Indian and a Japanese refiner told S&P Global on the sidelines of APPEC.
"Saudi Arabia wants their consumers to be satisfied," Luckock said.
Saudi Arabia said it will continue its 1 million b/d voluntary cut that is holding crude production at a two-year low of 9 million b/d through at least September. Still, Saudi Aramco has fully met Asian buyers' nominations for September-loading term crude oil supply, S&P Global reported previously.
Narrowing Brent-Dubai spread
A sharp downtrend seen in the Brent-Dubai benchmark price spread due to strength in the Persian Gulf market structure could lure Asian traders to take more sweet crudes from the US and elsewhere, but many Asian refiners would continue to seek and depend heavily on Middle Eastern sour crudes, the executives and trading sources said.
The Brent-Dubai Exchange of Futures for Swaps, or EFS, spread -- a key indicator of Brent's premium to the Middle Eastern benchmark -- flipped to negative at minus 19 cents/b on Aug. 24, marking the lowest spread since minus 22 cents/b on Oct. 20, 2020, S&P Global data showed. A negative EFS spread makes various sweet crude grades produced in the Americas, North Sea and Africa linked to the European Dated Brent benchmark more economical compared with Dubai-linked grades for Asian refiners.
Still, many new complex and highly sophisticated refineries in India, Kuwait, China and others broadly prefer to buy sour crude, though there's not enough of Middle Eastern sour crude supplies to go around, Hardy said.
Echoing this were South Korean and Japanese refinery delegates at APPEC, who said their mainstay would continue to be Middle Eastern sour crude grades. Price swings, such as the Brent-Dubai spread flipping to negative, only present short-term opportunities to procure more light sweet US crude.
"South Korean refineries are configured and designed to crack heavy high sulfur crude at maximum efficiency, so Middle Eastern sour grades will always be the primary feedstock," said a trading and logistics manager at a South Korean refiner on the sidelines of APPEC.
"We are flexible enough to take a lot of sweet [US and African grades] as well and the current EFS really works well for more US imports, but the staple Middle Eastern sour crude feed structure will never change."
"I think Japan would take the chance to buy a few light sweet US crude cargoes depending on the arbitrage window, but Saudi Arabian and UAE crude is the primary fit feedstock for Japanese [refining] system," said a delegate representing a Japanese refiner.
The US became the fifth largest crude supplier to Japan in July, when the Asian consumer imported 2.18 million barrels, or 70,211 b/d, compared with nil imports in the year ago and more than four times from 478,260 barrels, or 15,942 b/d, in June, latest data from the Ministry of Economy, Trade and Industry showed.
Still, around 2.43 million b/d, or around 95% of Japan's total crude imports of 2.554 b/d during the first seven months, were sourced from the Middle East, the data showed.