Despite a rally in crude oil prices to three-year highs, there is scant evidence that demand in the top importing region of Asia is recovering.
In fact, imports across the region dropped in September from the previous month, as high prices and economic disruption from the coronavirus pandemic continued to affect fuel demand.
What there is early evidence of is that the major producers in the OPEC+ group of exporters are re-gaining market share lost due to their earlier output cuts, as they ramp up production and cut their official selling prices.
Asia’s crude imports were 22.99 million barrels per day (bpd) in September, according to Refinitiv Oil Research, down from 23.24 million bpd in August and only just above July’s 22.61 million bpd.
China, the world’s biggest crude importer, brought in 9.6 million bpd last month, down from August’s 10.53 million bpd, according to Refinitiv’s vessel-tracking and port data.
The softness in September imports are most likely a reflection of the high official selling prices (OSPs) for Middle Eastern grades that prevailed at the time when September-arriving cargoes would have been arranged.
Also, a lack of available crude import and product export quotas may have constrained buying by China’s independent refiners, who account for about one-third of its oil demand.
September arrivals would have been booked around June and July, and it’s worth noting that since then the major Middle East exporters have moved to cut their OSPs, as well as boost output in line with an agreement by the OPEC+ group to add back 400,000 bpd every month from August to December.
Saudi Arabia, the world’s biggest crude exporter, lowered its OSP for its benchmark Arab Light grade to Asian customers for November-loading cargoes by 40 cents a barrel, to a premium of $1.30 a barrel to regional benchmark, the Oman/Dubai average.
It was the second consecutive month the OSP was cut, and the premium for Arab Light has now dropped by $2.60 a barrel in the past two months, having been set at $3 a barrel for September-loading cargoes.
This reduction in the Saudi OSP, which has been largely matched by other key Middle Eastern exporters such as Kuwait and Iraq, was followed by news that Saudi Aramco, the state-controlled oil giant, will supply additional crude to at least three Asian buyers in November, while meeting full contracted volumes for four others.
It seems that Aramco is keen to keep its oil competitive in Asia with a combination of lower prices and increased supply, working to take market share amid stagnant overall demand in the region.
The rising price of global benchmark Brent futures LCOc1, especially against the Dubai Mercantile Exchange’s Oman contracts OQc1, is a further incentive for Asian buyers to buy more Middle Eastern crude.
Brent futures ended at $82.39 a barrel on Monday, the highest close since Oct. 10, 2018, while Oman contracts finished at $81.66, also a three-year high.
It may not look like a big difference, but even a premium of 73 cents a barrel can quickly add up to millions of dollars, given the large volumes of crude being purchased monthly.
Perhaps a more relevant measure is the Brent-Dubai exchange for swaps DUB-EFS-1M, which measures the difference between the Brent price and the price of physical oil in Dubai.
At Monday’s close, Brent was at a $4.23 a barrel premium to Dubai, which is down from the recent high of $4.41 on Oct. 5, but still well above the 2021 low of 70 cents on Jan. 19.
The higher Brent price should discourage Asian buyers from taking cargoes priced against the benchmark, such as those from West African producers Nigeria and Angola.
The sharp increase in the U.S. benchmark crude contract, West Texas Intermediate CLc1 , which closed at a seven-year high of $80.52 a barrel on Monday, should also discourage imports from the United States.
U.S. exports have been impacted by production outages in the Gulf of Mexico from Hurricane Ida last month, with data from commodity consultants Kpler showing a slump in shipments to Asia in recent weeks.
Kpler assessed only 750,000 barrels of U.S. crude left for Asia in the week starting Oct. 4, none the prior week and 3.25 million barrels in the week starting Sept. 20.
In contrast, in the four weeks prior to Ida, U.S. exports to Asia were at a moving average of 6.52 million barrels a week, according to Kpler.