ADNOC crude cuts seen as a small drop in the ocean of market equilibrium

Singapore — Crude volumes cut by Abu Dhabi National Oil Company for its term customers over May move the market a step closer to rebalancing severe inequilibrium, but falls short of correcting market oversupply to a significant degree, said crude market participants in Asia on Wednesday.

"Whatever they do in terms of cuts for May is not enough [to rebalance the market]," said a senior crude trader based in Singapore, adding that "the [overall] impact is low as they must have very high inventory from when they ramped up April production."

ADNOC informed customers who lift contracted monthly volumes -- known as term lifters -- that it would cut the quantity of volumes available for export over May, traders who saw the notice told S&P Global Platts.

The state-owned entity will cut volumes of its more popular Murban and Upper Zakum grades by 15%, and those of Umm Lulu and Das Blend by 5% in May.

"It is up to the term lifter, [whether] to request a cut on Murban or Upper Zakum with the overall cut [adding up to] 15%," explained a trader with a China-based lifter.

"Even after 15% cuts Murban is far from being balanced. Excess Murban is not cleared, it has just found a place in storage for now," the first trader added.

ADNOC's decision follows the UAE's commitment to cut production from around 4.1 million b/d to some 2.5 million b/d under the latest OPEC+ accord, which will see 23 countries coordinate to withdraw 9.7 million b/d of global oil production off the market through May and June.

But oil demand is set to shrink nearly 30 million b/d year-on-year in April, according to market reports, leaving global markets heavily oversupplied despite the production cut agreement.

SOME PRICE SUPPORT

Still, the cuts will move prices for ADNOC's crude grades a step closer to parity, traders told Platts this week. Spot market differentials for the emirate's crude grades plunged to historic lows in March, as buying appetite receded with declining refinery run rates.

Price differentials for May loading cargoes of Murban and Das Blend fell into discounts of around $2/b to $3/b against their respective official selling prices, and to minus $4/b and $5/b against Platts front-month Dubai crude assessments.

With the underlying Dubai structure tanking to minus $9.70/b in April, values of June loading cargoes had taken a further hit, even after ADNOC cut OSPs earlier this month.

But as ADNOC engaged customers in finalizing monthly term volumes this week, buyers emerged on the spot market to secure cargoes ahead of the expected cuts.

Several bids were seen in the market for June loading cargoes of Murban, Das Blend and Upper Zakum.

Oil major Shell was seen bidding for 500,000 barrels of Upper Zakum crude in the Platts Market on Close assessment process in Asia on Tuesday with its final bid standing at a discount of minus 10 cents/b. This is up considerably from valuations below minus $1/b earlier in the month.

Meanwhile, Japanese trader Mitsui was reported to have procured a cargo each of Murban and Das Blend from equity holder Total in the spot market on Wednesday.

Prices for the three grades rose compared to offers seen in the spot market earlier this month. Where Total had initially offered a Das Blend cargo at a discount of $1.60/b to the OSP last week, its deal with Mitsui was concluded at a discount of 70 cents/b under the OSP, said traders.

Total's sale of Murban crude to Mitsui was priced at a discount of 40 cents/b under the OSP for June, where just last week BP had sold a similar cargo to Unipec at a discount of around $2/b, according to market reports.

OSP CUTS IN QUESTION

Despite an uptick in market rates from previous lows, ADNOC's grades are still trading in discounted differentials, said traders. This bodes another round of price cuts from the producer when it sets official selling prices for June loading cargoes next month, they added.

"How you see the market trading ADNOC grades is dependent on various views on how OSP is going to be set," the first trader said.

But with a high degree of uncertainty in oil markets, there is little guarantee that ADNOC would follow a prescribed methodology in setting OSPs next month, said market participants.

"Previously, OSP methodology was to follow market trade levels, but now this calculation is not a confirmed thing for the next round of prices, it could be anything, based on demand, oversupply, OPEC cuts etc," the trader added.

ADNOC declined to comment.

The OPEC+ alliance is next scheduled to meet June 10 via webinar. OSPs, which are typically released by the 5th of each month, could be delayed once again till after the June 10th meeting.