Adam: Hello, and welcome to another edition of "The Crude Report," the APAC series. I'm Adam McCarthy and I'm joined by Fabian Ng, our Crude Editor here at Argus Media. Today we're asking why are Middle East sour crude prices sliding, even as sanctions have put pressure on Russian supply? Fabian, start us off.
Fabian: Hi, Adam. The short answer is oversupply. The key group of eight OPEC Plus members has fully unwound a 2.2 million barrels per day set of production cuts this year, and in October, they began unwinding another 1.65 million barrels per day layer. By the end of December, they will have restored around 411,000 barrels per day of that second tranche. At the same time, non-OPEC supply keeps growing. The IEA, U.S. EIA, and Argus all forecast non-OPEC supply growth exceeding global oil demand growth next year by nearly 300,000 barrels per day. That's likely why OPEC Plus decided to pause further unwinding for the first quarter of next year, officially citing seasonality, but clearly responding to these market signals.
Adam: Yeah. Interesting. And yet inventories don't look bloated. Why is that?
Fabian: I think because the surplus is mostly hidden. Chinese crude inventories have been building at an average of around 800,000 barrels per day in January to September. So, that absorbed around 70% of the oversupply we estimate. And oil at sea has surged, so there's nearly 250 million barrels of crude that has left port this year and has not yet discharged, according to Kpler data. So, around 20% of that is Brazilian and Canadian, but more than half is Iranian, Russian, and Venezuelan supply.
Adam: So, the macro backdrop is heavy, but what's happening to the physical sour crude market in the Middle East?
Fabian: It has really come under pressure from these rising supplies. Most of the returning barrels from OPEC Plus producers are medium and heavy sour grades. So, this has created supply pressure on the heavier end. And Abu Dhabi's ADNOC switch fit stock at its Ruwais refinery in August, processing more of its light-sour Murban crude and freeing up more medium-sour Upper Zakum for export. Then Kuwait's Al Zour refinery also went offline unexpectedly in October, and that released from-heavy barrels and pushed Kuwait's exports to 1.74 million barrels per day in November, which was a two-year high. Now, KPC sold crude via spot tenders and asked turn buyers to lift extra volumes, and South Korea and India absorbed most of it, but the glut still pressured pricing.
Adam: I see. How exactly did that affect pricing?
Fabian: We did see that the backwardation in benchmark Dubai crude, which is the key indicator of the strength of the Middle East medium-sour crude market, narrowed to a one-year low premium of around 90 cents per barrel in November. This trend has continued so far in December, with the backwardation narrowing slightly, although the spot trade cycle has yet to fully kick off in earnest. Another key trend that has emerged is the widening of the light-medium-sour spread. ADNOC's decision to switch the feed stock at its Ruwais refinery to process more light-sour Murban over medium-sour Upper Zakum has helped to boost Murban back into its traditional premium to Upper Zakum. The two grids had traded near parity for most of the past two years since ADNOC first tweaked its Ruwais feed stock to run more heavy Upper Zakum following the completion of its crude flexibility project back in early 2024. Now, Murban averaged a premium of just over $1 per barrel over Upper Zakum in November, which was a two-year high.
Adam: And demand hasn't offset this. Have the recent U.S. sanctions targeting Russian producers, Rosneft and Lukoil, prompted more demand for Mideast crude, especially to replace medium-sour Urals?
Fabian: Not enough, to be honest. Despite some expectations that Asian refiners, particularly from China and India, may pick up buying of Middle East crude, this has not really materialised. While Chinese state-owned refiners have completely stopped purchases of Russian crude since the trade cycle for November delivery volumes, they have not really stepped up their intake of Middle East crude to compensate for these cargoes. In fact, Saudi Aramco's December term allocations to its Chinese customers last month dropped to around 1.18 million barrels per day, which was actually the lowest since April. And by early December, Chinese state firms had already booked record volumes of Brazilian crude for February delivery before the actual release of Aramco's latest January formula prices. This is because 2P is about $1.60 per barrel cheaper than Upper Zakum on a delivered-to-China basis. But latest info indicates that China's January term Saudi crude intake will jump to around 1.6 million barrels per day, which suggests that Aramco's consecutive price reductions have managed to entice some demand.
Adam: And India? Haven't some refiners there stated that they will move away from Russian oil?
Fabian: I think that also remains uncertain. While some refiners like MRPL have stopped buying Russian crude completely and turned to Middle East cargoes, other refiners have turned to other sources of supply, including from West Africa and Latin America, as well as the first shipments of Guiana crude to India in four years. And Indian refiners look like they may again start buying more Euros. Russian president, Vladimir Putin, recently pledged uninterrupted fuel supply to India during his visit in early December. And a Kremlin spokesperson also said that India will continue buying energy resources where it is efficient. The Indian government said that energy sourcing is dependent on the dynamics of global markets, and private companies will make decisions based on commercial considerations. Argus has said that at least one state refiner is in talks to buy Euros for January. If Indian refiners pivot back to Euros in a big way, Middle East barrels stand to lose more ground.
Adam: So, Middle East producers face challenges from Brazil and Russia and China, and Euros in India, plus oil at sea overhang.
Fabian: Exactly. And that's not all. So, Thailand has also started buying Guiana crude, and U.S. WTI could continue to challenge Murban's share in Asia as well. So, the competition is really intensifying.
Adam: So, what's the bottom line for Middle East producers?
Fabian: I think pricing will remain the main lever, as they seek to defend market share. With OPEC Plus pausing its supply hikes, producers must keep term prices competitive against other barrels from the Atlantic basin, including the Americas and West Africa. So, expect continued pressure on medium and heavy sour premiums. Furthermore, if Euros flows rebound and exports from the Americas stay strong, Middle East grades risk losing ground unless they are dead.
Adam: Thanks, Fabian. That's a fascinating look at how oversupply and shifting trade flows are reshaping the sour crude market. And that's all for this episode of "The Crude Report," the APAC series. We'll be back soon with more insights on the forces shaping all markets. Thank you for listening.
Fabian: Thank you.
