Weak Asian demand, arbitrage inflows may weigh on Oct Middle East crude differentials

Lackluster demand from key Asian crude importing countries like China and Japan and a potentially higher inflow of arbitrage barrels into the region could put pressure on spot differentials for Middle East crude when trading for October-loading barrels picks up pace in the week starting Aug. 8, traders told S&P Global Platts.

Various medium and heavy Middle East crude grades could struggle to find a home in China and other parts of Asia as demand is impacted by fresh COVID-19 outbreaks and refinery turnarounds, market participants said.

"Premiums should be lower ... last month [July] should be the peak [for spot premiums] and this month could be lower," a crude oil trader in Singapore said.

With Middle East producers in the process of raising term crude prices for Asian buyers, many of the region's refiners are likely to seek barrels from outside the region.

Arbitrage barrels from the West, which had earlier been held off by a sturdy sour complex, are now increasingly enticing Asian buyers, some sources said.

The Brent/Dubai spread narrowed from a high of $4.39/b on July 7 to $3.34/b on Aug. 5, Platts data showed. A narrower spread makes crude priced against Dubai less economically attractive for Asian refiners compared with Brent-linked ones.

"Window will open more this month. 30 days ago nothing was open maybe except Mars," another trader in Singapore said.

US grades such as WTI Midland and Mars crude have seen an uptick in shipments to India and South Korea while Angolan crude demand languishes due to lower Chinese appetite, the second trader in Singapore said.

"WTI and Mars arbitrage is open. That will eat up a lot of Oman and Murban demand," the same trader said.

For many Asian refiners, cheap prices and supportive freight levels are hard to overlook despite their preference for Middle East oil, a trader with a north Asian refinery said.

"Mars is slightly cheaper than Oman but can't be compared to Oman," the trader said, adding though that it could still pressure spot differentials in the current trading cycle as Asian refiners are drawn to attractively priced arbitrage barrels.

Softening demand

China's demand continues to remain weak amid lower crude import quotas for independent refiners and national oil companies opting for reserve crude stockpiles, sources said.

The country's problems have further been compounded by new virulent outbreaks of COVID-19 causing mobility curbs in several cities and districts, further hindering oil consumption.

"Delta concerns and natural disaster [floods] in China, impacted [demand] a bit," the same trader with the north Asian refinery said, while adding that a recovery period of more than a month from the recent outbreaks could strongly impact consumption during the Golden Week holidays in October.

Apart from China, several Southeast Asian countries have already been reeling from severe outbreaks reducing demand for crude due to a depressed appetite for products like gasoil and gasoline.

Indonesia, Southeast Asia's largest buyer of gasoline, announced earlier in the week that movement restrictions would continue to be extended, with malls and other nonessential places staying shut.

"The [COVID-19] situation in Asia is bad. The new surge has made unlocking in many countries uncertain. Moreover, these countries are the ones that import gasoline," one Singapore-based source said.

The overall picture for Asia in terms of gasoil demand recovery also appears bleak due to the surge in infections.

"The Southeast Asia story remains the same ... Malaysia, Indonesia, Vietnam and Thailand are still battling the delta outbreak, and then over the weekend, things in China began to look like it's getting more serious, with the new lockdowns and the fact that the virus has made its way to Beijing," a gasoil trader in Singapore said. "So even without talking about the export quota, I think the market is pricing in a slower recovery, especially compared to the West."

Spot differentials for Middle East lighter crude grades could also come under pressure as Japan's autumn turnaround season sets in, further weighing on demand, traders said.

"I guess linked to turnarounds in Japanese refineries in October," said a trader with a European oil company, referring to the narrowing premium of light, sweet Murban versus medium, sour benchmark Platts Dubai.

Month to date in August, the Platts Murban spread to Platts Dubai has averaged at a premium of 57 cents/b, compared with an average premium of 82 cents/b for July, Platts data showed.