Refiners stay calm despite deep Adnoc crude export cuts

Lower refinery runs in Asia-Pacific because of weaker margins, along with expectations of adequate alternative supplies, have offset the bullish impact of a planned 30pc cut in Abu Dhabi state-owned Adnoc's October term crude exports.

Adnoc told customers at the end of August that it will implement 30pc nomination cuts to all its crude export grades for October loading, deeper than the 5pc cuts it imposed for September exports. This 30pc cut will the deepest nomination reduction that Adnoc has applied since it first trimmed its allocations earlier this year for May-loading crude. The announcement of the October cuts took a few northeast Asian refiners by surprise, prompting them to consider replacement cargoes.

Some refiners will likely try and get more supplies of Saudi Arab Extra Light and Arab Light crudes, as these will be comparable in quality to Abu Dhabi's light sour Murban and Das and medium sour Upper Zakum. The attractive October official formula prices for these Saudi crudes will make them first choices for Asian refiners looking to fill the supply gap in their Adnoc crude imports. State-controlled Saudi Aramco slashed October Arab Light and Arab Extra Light prices by $1.40-1.50/bl from the previous month, setting prices at their lowest level in four months. The lower Saudi prices could signal more willingness by Aramco to give its term buyers increased October volumes if needed, following easing of the Opec+ output restraint, traders said. Aramco had cut monthly crude allocations to Asia-Pacific in recent months as it complied with its Opec+ output quota.

Other refiners, particularly in South Korea, were looking at light sour Caspian CPC Blend crude to replace Abu Dhabi light sour Murban. The narrow Brent-Dubai exchange-of-futures-for-swaps, or the premium of Ice Brent to Mideast Gulf benchmark Dubai, may have made Dated-linked CPC Blend attractive.

But some refiners are not specifically seeking volumes to replace the loss in Adnoc crude or are only looking to replace part of the losses, as depressed refining margins have led to run cuts and curbed their crude requirements. The softer crude market is evident in the structure of Dubai crude, which remains in a contango, with prompt prices below prices in the forward contracts. Dubai spreads flipped into a contango at the end of July. Front-month November Dubai yesterday was at a discount of 67¢/bl to third-month January Dubai from a 35¢/bl discount on 1 September.

A slow recovery in oil products' demand has weighed on refining margins. Jet fuel crack spreads in Asia-Pacific, or the spread of jet fuel to Dubai crude, remain negative after falling to a discount on 18 August. Gasoil margins in Asia-Pacific have also eased and are currently around three-month lows. Refining margins for Singapore 0.5pc marine fuel contracted to two-month lows in September on the prospect of a regional rise in supplies because of refinery issues in Asia-Pacific.

It is uncertain if weaker margins will lead to further refinery run cuts in Asia-Pacific, but what is clear is that the deep Adnoc October term crude export cuts have not led to panic buying among refiners. Many seem to be taking the news in their stride, indicating that they are not anticipating a crude market that will be short of supplies.

By Azlin Ahmad, Fabian Ng and Yvette Choo