Podcast: The Saudi crude oil supply shock comes at a time when refiners across Asia were already challenged to replace sanctioned Iranian barrels.
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. The date is 24 September 2019. I’m Alejandro Barbajosa, Vice-President, Crude, Middle East and Asia-Pacific. Today’s topic is, Coping with disruption: Saudi supply shock rattles Asian crude markets.
After a decade of oil supply diversification across Asia driven by growth in Russian, US and other Atlantic basin crude exports, security of supply is coming back with a vengeance. Attacks on Saudi oil infrastructure in mid-September temporarily idled more than half the kingdom’s production, raising supply concerns around what had been considered the world’s most stable source of oil.
Refiners in China, Japan, South Korea and India, the four largest oil consumers in Asia, are scrambling to secure cargoes to compensate for potential losses in Saudi volumes or changes in crude quality as national oil company Aramco reshuffles stockpiles and shipments to meet contracted volumes. This has triggered a sharp reaction in the value of those grades that best serve as replacements for Arab Light and Arab Extra Light, the two Saudi streams that were directly affected by the disruption.
The most obvious and immediately available replacement for the lighter Saudi grades on the spot market is Abu Dhabi Murban crude, which was bid up to the strongest premiums in six years as participants snatched cargoes when markets opened following the attacks. The disruption came just at the peak of activity in the monthly trading cycle for crude in Asia, so trading companies also rushed to develop positions amid expectations that strong demand from refiners would help them book a profit later in the month. Qatari al-Shaheen crude jumped to its highest in four months, while the premium paid for prompt Dubai crude relative to the price for two months forward widened to a six-year high.
The Saudi supply shock also comes at a time when refiners across Asia were already challenged to replace sanctioned Iranian barrels. Saudi Arabia this year recovered the crown as China’s largest crude supplier, with average shipments of 1.55mn b/d in the period between January and July. Aramco supplied a combined 4.2mn b/d over the same period to its top four clients in the region, representing 58pc of total Saudi exports of 7.3mn b/d.
While Japan and South Korea typically rely on Saudi Arabia for about 30-40pc of their crude imports, and China and India buy 15-20pc of their crude from the kingdom, surging crude production and exports from the Americas have tempered the severity of the disruption. Prices of Brazilian Lula crude delivered to independent refiners in Shandong also surged in the wake of the attacks. And state-owned Chinese refiners returned to the market for US cargoes, despite Beijing’s imposition of a 5pc tariff on American crude in the context of the Sino-American trade war. Sri Lanka debuted as the latest Asian buyer of US crude, seeking a WTI cargo for December, a suitable replacement for Murban, while India and Taiwan also issued tenders with options to buy US crude after the Saudi attacks.
So far this year, the price of WTI Houston crude of Permian quality delivered to northeast Asia has on average been almost 90¢/bl lower than the equivalent price for Murban crude delivered to the same region, Argus data for crude delivered to northeast Asia show.
Middle East crude values receded after the Saudi energy minister and the head of Aramco outlined plans for a return to pre-attacks production levels as early as October. But prices of Russian grades that typically start trading later in the month still surged to multi-year highs amid strong demand from refiners and trading companies across the region. Russian ESPO Blend premiums to Dubai hit a six-year high, while Sokol differentials reached their highest level in five years.
In another sign of the far-reaching implications of the supply shock, Saudi state-owned Aramco Trading will for the first time buy Kuwaiti Export Crude to supply Aramco-affiliated refineries in northeast Asia. And this may not be the last of surprises that the market throws at us as the reverberations of the world’s largest supply disruption trickle down global physical crude chain. Accurate pricing signals will help in the reallocation of resources across the vast Asia-Pacific refining system. And inevitably, governments and refiners throughout the region will aim to enlarge their strategic and commercial storage as the veil of infallibility surrounding Saudi crude exports fades with the possibility of new attacks on the kingdom’s oil infrastructure.