Refiners across the top-importing region of Asia are being forced to adapt buying patterns as the additional output cuts by Saudi Arabia have reduced availability of their preferred medium sour grades of crude.
The kingdom, the top oil exporter and de facto leader of the OPEC+ group, on Sept. 5 extended its voluntary production cut of 1 million barrels per day (bpd) till the end of the year, while Russia, the second largest producer in the group, extended its 300,000 bpd output cut over the same period.
Reacting to tighter supplies, global benchmark prices have risen – Brent reached $90 a barrel last week for the first time in 10 months.
But the main benchmarks are toward the light sweet end of the crude spectrum, whereas as the impact of the OPEC+ output cuts has been felt most strongly in the medium sour segment.
Many of the newer, complex refineries in Asia prefer medium sour crude as it offers a higher yield of middle distillates such as diesel and jet fuel. And the lower exports from Saudi Arabia and several other Middle East producers, such as Kuwait and the United Arab Emirates, has left them scrambling to secure supplies.
As a consequence, prices for these grades have outperformed the light sweet benchmarks.
The Brent-Dubai exchange for swaps, which measures the difference between Brent and Dubai, a medium crude, has narrowed and briefly flipped from its usual premium for Brent to a discount.
Brent slipped to a discount of 17 cents a barrel to Dubai on Aug. 28, before recovering slightly to end at a premium of 85 cents on Monday.
However, it’s worth noting that at the start of this year Brent commanded a premium of $5.97 a barrel over Dubai, and it reached as high as $17.50 in the aftermath of Russia’s invasion of Ukraine.
A medium sour crude such as Iraq’s Basrah Light , which historically has traded at a discount to dated Brent , is currently commanding a premium of $2.63 a barrel.
The higher prices for medium crude grades is impacting the ways in which crude is flowing around the world.
India is a case in point, with Asia’s second-biggest importer switching to Russian Urals crude and away from more expensive Middle East grades.
Russian crude has been sold at a wide discount to other grades as a result of Western sanctions against Moscow, but this discount has narrowed sharply in recent weeks.
The reason is that India’s refiners are struggling to source medium crudes such as Urals and have little choice but to pay more for the Russian grade.
India’s imports from Iraq were 29.17 million barrels in July, the highest month so far this year, but they dropped to 26.43 million in August and are on track to drop again to around 24.63 million this month, according to data compiled by commodity analysts Kpler.
China is also changing its buying patterns by boosting imports from suppliers outside of OPEC+.
Assessing imports from Iran is difficult as China doesn’t formally report purchases from the Islamic Republic, which is under Western sanctions over its nuclear programme.
However, Kpler is estimating that China’s imports from Iran will reach 28.7 million barrels in September, which would the most since April 2019 and double the levels that have prevailed for most months so far in 2023.
China is also ramping up imports from the United States, with Kpler expecting arrivals of 10.17 million barrels in September, rising to 17.25 million in October.
China’s imports from Brazil are expected to reach 29.07 million barrels in September, which would be the highest in three years, according to Kpler.
The scramble for cheaper oil from non-OPEC+ suppliers may lower costs, but it sometimes results in sub-optimal utilisation of refining units, which leads to plants producing more light distillates such as gasoline and naphtha, and less diesel and jet fuel.
This is partially why Asia’s profit margin for gasoil , the building block for diesel and jet fuel, has rallied strongly in recent months, hitting an 8-month high of $36.13 a barrel on Aug. 28, more than three times higher than the 2023 low of $11.58 from April 28.
While Saudi Arabia may have been successful in boosting oil prices, it is also disrupting the markets and altering physical crude flows.
The risk is that when it and other OPEC+ producers decide to end their output cuts that they discover buyers are now comfortable with the new arrangements they have been forced to make.