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HomeBusinessOil refiners in Asia seek alternative sources after OPEC+ mull output cuts

Oil refiners in Asia seek alternative sources after OPEC+ mull output cuts

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Oil refiners in Asia — like the wider crude market — have found themselves caught out by the surprise Saudi-led move to spearhead an OPEC+ production cut, and are now preparing to diversify purchases in the spot market if needed.

The shock decision from Riyadh and some of its partners came just before the release of Saudi Arabian Oil Co.’s official selling prices, or OSPs, for May crude sales. Term buyers of Saudi crude expressed some concern about their ability to get the volume and type of oil they want from Aramco next month after the announcement of a 500,000 barrel-a-day curb by the Kingdom.

Given the turmoil in the market, some Chinese refiners are starting to mull spot purchases from suppliers including Latin America, the US and West Africa to make up for a shortfall should OSPs from Saudi Aramco and other producers become too expensive, according to people familiar with trading strategies.

Oil futures surged as the week opened following the supply cut. The plan was announced in piecemeal fashion at the weekend, with Saudi Arabia unveiling a plan for lower production that was followed by smaller moves by other nations. Riyadh, along with Moscow, are the de facto leaders of OPEC+, as the Organization of Petroleum Exporting Countries and its allies are known.

Persian Gulf nations such as Saudi Arabia and Iraq sell the bulk of their oil to Asia, with China, India, Japan and South Korea as the biggest buyers. Aramco typically releases OSPs in the first five days of the month, and they are used as a benchmark by others. In a Bloomberg survey last week, six refiners and traders predicted a cut for Aramco’s OSP for its flagship Arab Light grade.

READ ALSO:  Saudi Arabia announces surprise 500,000 barrels a day oil output cut

“The imminent Saudi OSP is probably a key variable,” said Jianan Sun, a London-based analyst with Energy Aspects Ltd., adding that if Saudis don’t lower or even raise the prices, Asian refiners will need to “actively look for alternative grades,” whereas if the OSP is lowered, the situation is not that pressing.

As refineries in Europe and US step out of maintenance, their demand will also recover, which would lead to higher costs for grades such as West African, he said.

The surprise move boosted Brent futures by more than 8% as the week’s trading began. It comes at a complicated juncture in the market, with concerns about weaker consumption in the US and Europe gathering pace should a recession coincide with a wave of demand-sapping refinery strikes in France and, on the upside, expectations that consumption in China will pick up.

Ahead of the shock, China’s state-owned PetroChina Co. has already been tapping supplies from Canada, Colombia and Ecuador, buying at least 8 million barrels that will load this month as a new mega-refinery starts production officially in Guangdong, Bloomberg News reported last week.

In India, another major consumer of Middle Eastern crude, Mukesh Surana, chief executive officer of Ratnagiri Refinery and Petrochemicals Ltd., which is building a refinery, said that OPEC+ may have decided on a supply reduction as it foresaw a weaker market.

“The market is well-supplied, so there is no concern on availability,” said Surana, who’s also ex-chairman of Hindustan Petroleum Corp. “OPEC+ must be expecting a fall in prices or dip in demand, so this is probably a preemptive move to provide floor to prices. But I don’t see prices rising above $90.”

(Story first published by Bloomberg)

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