Singapore — Asia is largely expected to remain a buyers' market in 2019, with crude oil producers set to offer attractive prices and extra volumes in a bid to defend their market share in the region this year.
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"Arbs [are] wide open and expected to remain so for next year," a crude trader based in Singapore said.
North Asian refining giants such as China, Japan and South Korea in particular, have longstanding term contracts with Middle Eastern producers such as Saudi Arabia, Abu Dhabi and Kuwait, who provide a guaranteed flow of crude oil into their refineries every month.
However, a surplus in global crude oil inventories in recent years has made crude arbitraged from North and South America as well as Europe and West Africa into Asia quite viable, despite being priced off historically more expensive base benchmarks like Brent and WTI.
High production from the US in recent years has pushed premiums for lighter, sweeter crudes lower globally, making them doubly attractive compared with those priced off Dubai or Oman.
US crude production at the end of November 2018 was 2 million b/d higher year on year at 11.7 million b/d, the US Energy Information Administration said recently.
About 1.1 million b/d of US crude flowed into Asia in the same month, up from 627,000 b/d in November 2017, data from Platts cFlow, trade flow software, showed.
The trend is expected to continue in 2019, and surplus US production is expected to flow mainly into Europe, which in turn will lead to European crude grades looking for homes in Asia.
The Brent/Dubai Exchange Futures for Swaps spread is used by traders in hedging their exposure to selling arbitrage barrels of Brent-based crude in Asia. A narrower EFS allows Brent-based crude grades to be more competitive to Dubai-based crude grades.
Global crude flow dynamics led to a surplus of Brent-based barrels towards the second half of last year, narrowing Brent's premium to Dubai from an average of $3.49/b in Q1 2018, to $1.86/b in Q4. The EFS for March settled even lower, at $1.03/b on the first trading day of 2019, January 2.
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ASIAN PRODUCERS COMPETE FOR MARKET SHARE
The trend has not been lost on the Middle Eastern producer-giants, who perhaps stand to lose the most from Asia-bound arbitraged cargoes of US and European crude grades.
Although the producers are hedged to a certain extent via their longterm contracts with North Asian refiners, revenues could still take significant hits if buyers choose to exercise their contractual optionality and nominate minimum volumes to load from the Persian Gulf, in favor of cheaper alternatives.
The producers have resorted to various methods to retain market share and loyalty within their Asian customer base.
Refiners in Asia reported minimal impact to their monthly supplies of crude oil nominated for January 2019, shortly after a December OPEC meeting calling for a production cut. Saudi Aramco, in particular, was reported to have fulfilled all nominated barrels from North Asian refiners.
"We have received our full allocation," a China-based refiner said, while a Singapore-based trader said: "Saudi [Aramco] filled all [January] nominations".
"Despite OPEC cuts, they [Aramco] are properly looking after term customers in the East," the first trader said.
UAE's ADNOC announced a 15% cut in volume of Murban crude for January loading last month, but buyers said this would only help to stabilize the excessive volume of Murban and light sour crude that had been seen in the Asian market in recent weeks. No immediate shortage of Murban, Das or other light sour crude blends is expected.
Additionally, Saudi Arabia announced aggressive price cuts for its January 2019 official selling prices for Asia, a move many traders saw as evidence that the OPEC kingpin is worried about its market share in the region.
Meanwhile, Iraq's SOMO has taken a different route. In the last quarter of 2018, the company came down hard on term holders who were flouting contractual restrictions on moving cargoes within regions.
SOMO has since attempted to provide requested volumes in Asia directly to refiners via its joint ventures in China and the UAE, bypassing term holders who would move destination-restricted volumes globally depending on region-specific demand.
"$1/b premium for Basrah [Light] don't make sense, but people are buying it anyway, because they need it and resales are not happening," the first crude trader said in late December.
--Eesha Muneeb, firstname.lastname@example.org
--Edited by Norazlina Juma'at, email@example.com