OPEC's output pledge music to ears of pandemic-hit Asian oil buyers

The affirmation from OPEC and its allies that recovering demand had created conditions to boost output will offer relief to Asian oil buyers in the hope the move would ensure adequate supply and potentially prevent a sharp rise in prices at a time some economies are witnessing a resurgence of the COVID-19 virus.

With the alliance betting on the fact that an improving demand outlook will outweigh the surge of coronavirus cases in India, Brazil, and Japan, analysts told S&P Global Platts that OPEC's optimism stems from the argument that demand from some Asian buyers such as India would be affected, but not to the extent that will make a huge dent on their crude buying plans.

Therefore, the last thing Asian buyers would want are higher prices as they try to rebuild their economies. Asian refiners said they expect the additional OPEC+ barrels from May to put a brake on the uptrend in Middle Eastern crude official selling prices.

"The affirmation from OPEC is in line with our views. Quotas are set to gradually rise. We forecast that OPEC+ crude supply will grow by 3.6 million b/d (including the Saudi 1 million b/d) between April and August. Although the COVID-19 situation in India is alarming, surging global oil demand will cause compliance to wane," Ashutosh Singh, manager of oil and gas production analytics at Platts said.

OPEC and its allies have the green light to ease back on their production cuts after ministers on April 27 endorsed previously agreed plans to boost crude oil output from May. The alliance intends to pump some 2 million b/d more crude oil by July.

In April, the 23-country alliance, which controls roughly half of world oil production capacity, had committed to holding about 8 million b/d of crude off the market.

Asia's oil demand outlook robust

Platts Analytics expects Asia's 2021 oil demand to recover to above that of 2019, with growth of 2 million b/d in the year, after declining 1.9 million b/d in 2020.

ING Economics said in a research note that while there is concern over the COVID-19 situation in India, there are expectations of a strong recovery in H2. "In addition, our balance sheet continues to show that the market will be able to easily absorb this additional supply from OPEC+."

Platts Analytics expects India to witness a year-on-year oil demand growth of 400,000 b/d in 2021, although it has been revised down from an earlier growth estimate of 440,000 b/d.

Asian refiners have been receiving fewer Middle Eastern term crude barrels than their original contractual volumes over the past year as Persian Gulf suppliers maintained strong discipline over production levels, but sources at major Asian crude importers said they were hopeful that full contractual volumes would be met from as early as May, if not June or July onwards.

Major refiners across Asia had their term allocations reduced by 10% to 15% for April-loading barrels, according to multiple refinery and trading sources surveyed by Platts.

"Any shortfall from term crude allocations had to be filled by actively purchasing cargoes from the spot market and that's been a rather big hassle," a senior crude trading and feedstock manager at a state-run refiner in Beijing said.

Breathing space

A sour crude trader at a major South Korean refiner added: "The term crude allocation cuts have very much forced many Asian refiners to actively seek top-up cargoes from the spot market, which supported the benchmark Dubai price structure and the overall Middle East OSPs."

Earlier this month, Saudi Aramco raised official selling prices for all its Asia-bound crude grades for May. The OSP differentials against Dubai/Oman for Saudi Arab Light for loading in May was raised by 40 cents, while Arab Medium and Arab Heavy were both raised by 50 cents from April.

However, with more supply hitting the market next month, coupled with the expected slowdown in buying from Indian refiners, the OSPs may undergo a correction as the physical Dubai crude market structure tumbled to a nine-week low, feedstock trading managers at major South Korean, Japanese and Thai refiners said.

The spread between front month Platts cash Dubai and same-month Dubai swap fell to 52 cents/b on April 27, the narrowest since 33 cents/b on Feb. 24, Platts data showed.

"The latest decision should offer breathing space for Asian buyers like India, who have been vocal when Saudi Arabia announced surprise product cuts earlier this year," an oil industry source said. "With countries like Japan and India still not out of the woods yet, as far as the pandemic is concerned, a supply squeeze from OPEC+ could have added to Asia's pain."