Podcast: Just as surprising as last month’s attack on Saudi oil infrastructure was, the global oil market is witnessing an incredibly smooth recovery. But a different picture emerges when looking closely at physical crude differentials.
Higher freight rates are exacerbating the price impact of last month’s attack on Saudi Arabia’s oil infrastructure and the ensuing disruptions. While the kingdom has managed to stage an impressive recovery in output, ensuring all its customers remain adequately supplied, crude grades flowing from almost every region to Asia-Pacific are still posting record or multi-year high prices relative to their benchmarks. The deteriorating economics for long-haul crude shipments is helping embed tightness across Asian physical crude markets.
Welcome to this latest podcast from Argus, a leading provider of energy and commodity price benchmarks. We track and discuss the prices that create our world. I’m Alejandro Barbajosa, Vice-President, Crude, Middle East and Asia-Pacific. Today’s topic is, Coping with disruption: Markets stabilise as Saudi oil prices rise.
Just as surprising as last month’s attack on Saudi oil infrastructure was, the global oil market is witnessing an incredibly smooth recovery. Restored output from the kingdom and a seamless replacement of crude volumes supplied to Aramco’s clients helped dissipate the effect of the disruption in futures markets. But a different picture emerges when looking closely at physical crude differentials, or the premiums or discounts for specific quality crude grades sold to spot and term buyers.
Asian refiners are indeed paying the strongest differentials relative to crude benchmarks in several years for most Middle East grades, after the region’s national oil companies (NOCs) raised their monthly official selling or formula prices (OSPs) in response to a sharp upturn in the pricing signals that are regularly taken as an indicator of tightness or oversupply in physical markets.
The premium of the front-month Dubai crude contract relative to the value of the third-month contract jumped as high as $3.10/bl in the second half of the month after the 14 September attacks on Saudi oil infrastructure, from as low as $1.50/bl before the disruption. This price structure, known as backwardation, implies participants are ready to pay more for prompt supplies than for later in the future. The steeper backwardation, which for the second half of September was the widest in almost eight years, triggered sharp increases in Aramco’s monthly official crude prices, which other Middle East NOCs follow to maintain the competitiveness of their export grades.
Arab Light’s November official formula premium to the Oman-Dubai benchmark was the highest since January 2014, while premiums for heavier grades were the strongest since as far back as January 2012. Abu Dhabi’s Adnoc set the retroactive official selling price for its flagship Murban crude at the widest premium to Dubai since February 2014, while the Upper Zakum OSP was the strongest since November 2013.
Non-Middle East crude values are still near record highs relative to their benchmarks despite the return of most affected Saudi output. The premiums for Brazilian Lula and Russian ESPO delivered to Chinese refiners in Shandong surged to record levels this month, reflecting both the Saudi supply shock and strong diesel margins in China. Even US refiners became more active in the market for Lula in the wake of the Saudi attacks, squeezing supplies to Asian markets and intensifying the competition for crude between China’s state-controlled and independent refiners. Sinopec, which takes about 60pc of China’s crude imports from Saudi Arabia, has been forced to retain a higher proportion of its equity of Omani crude rather than reselling it on the spot market.
High freight rates following the introduction of US sanctions on Chinese shipping company Cosco are also slowing long-haul shipments of Atlantic basin crude to Asia-Pacific, further straining already tight physical markets. WTI delivered to northeast Asia for January arrival is now trading at a premium of close to $8/bl to December Dubai, up from a premium of about $6/bl in late September.
The disruption to Saudi output wasn’t negligible. On average, the kingdom’s crude output fell to an almost nine-year low of 8.4mn b/d in September, Argus estimates, down by 1.4mn b/d from the previous month. But production has rebounded to almost 9.9mn b/d this month, unchanged from the guidance that Aramco had given before the attacks. And while shipments of Saudi crude fell in September by 6pc from August, Aramco redirected crude from overseas storage and away from its own domestic refineries to export markets to meet the needs of Asian refiners, who are getting full nominations of Saudi crude this month. Still, the legacy of the attacks is embedded in physical markets as refiners keep paying higher premiums for supplies coming from virtually every region, relative to shipments they received before the disruption.