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Japan secures ample sour crude from UAE in Aug but Middle East price structure seen expensive

Highlights

ADNOC has been respecting Asian customers' term supply deals

Traders, refiners find Saudi OSP premiums expensive

  • Author
  • Gawoon Vahn    Irene Tang    Rong wei Neo
  • Editor
  • Shashwat Pradhan
  • Commodity
  • Oil

Japan secured ample sour crude supply from the UAE in August as it picked up almost 10% more light and medium sour Abu Dhabi grades from a year earlier, though refiners and traders raised some concerns over rising feedstock procurement costs amid an expensive Middle Eastern price structure.

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Asia's fourth biggest crude importer received 1.15 million b/d of crude oil from its top supplier UAE in August, up 9.5% from a year earlier and up 18.6% from July, data from the Ministry of Economy, Trade and Industry showed Sept. 29.

Despite OPEC and its alliance members' firm stance to control and limit the group's crude production levels, refiners across Northeast Asia have had little trouble securing adequate Middle Eastern sour crude as top Persian Gulf producers typically prioritize their key customers in the Far East, feedstock management sources at major Japanese and South Korean refiners told S&P Global Commodity Insights.

"Securing adequate Middle Eastern term supplies is never an issue since big suppliers like ADNOC (Abu Dhabi National Oil Co.) and Aramco greatly respect Japanese customers," a sour crude trading and logistics manager at a major Japanese refiner said.

ADNOC has allocated full term supplies to most Asian buyers in Northeast and South Asia for December-loading crude, according to market participants surveyed by S&P Global. The producer has been keeping allocations to its Asian buyers whole so far through most of this year, though requests for increments have not been met.

Expensive Middle East crude complex

However, the overall sour crude price structure is looking expensive, and official selling price premiums and outright prices are bound to extend the uptrend. This bodes ill for Asia's fourth biggest crude importer, which depends on Persian Gulf producers for more than 95% of its crude requirement, according to crude procurement and logistics management sources at two Japanese refiners based in Tokyo.

Crude imports from Saudi Arabia in August fell 24.3% year on year to 901,463 b/d, while shipments from Kuwait tumbled 50.6% from a year earlier to 152,884 b/d, METI data showed.

In total, Japan's August crude imports dropped 16.2% from a year earlier to 2.498 million b/d.

"The Japanese yen is extremely weak this year and it's always important to find the right term-spot purchasing ratio in times like this [when both outright prices and OSP price differentials are on the rise]," said a feedstock management source at ENEOS.

Japanese crude traders expect Saudi Aramco to once again lift official selling price differentials for most of its Asia-bound crude grades, raising concerns that rising feedstock costs may squeeze refining margins.

Much of the Middle Eastern sour crude complex remained underpinned by additional voluntary cuts from Saudi Arabia and Russia.

The OSP differential for Saudi Arab Light crude has risen for four consecutive months to a premium of $3.60/b against the Oman/Dubai average for October, and most Japanese and other Asian traders surveyed by S&P Global said they expect Aramco to raise the OSP differential for the grade by 30-50 cents/b for November.

Saudi OSPs are looking expensive and refinery run rates have been under pressure since early August amid dismal industrial sector fuel demand, refinery sources and market analysts said.

Japan's weekly average refinery run rate fell to 74.2% during Sept. 17-23 from 84% seen in the week of Aug. 6-12, latest data from the Petroleum Association of Japan showed.

Also, Japan's manufacturing output fell for a fourth straight month in September and at a faster rate than in August. New orders for Japanese manufactured goods declined at a historically elevated pace in September as global market conditions worsened and with destocking efforts still ongoing at clients, according to anecdotal evidence, S&P Global economics analyst Jingyi Pan said.

"Japan's business confidence in September also eased from August and the sustained shedding of the volume of backlogged work in the manufacturing sector further outline the likelihood for the downturn to persist," Pan said in a recent report.

Japan's top 10 crude suppliers (Unit: b/d)

Supplier Aug 2023 (b/d) Share (%) Aug 2022 (b/d) % chg on year July 2023 (b/d) % chg on month
UAE 1,148,861 46.0 1,049,323 9.5 968,345 18.6
Saudi Arabia 901,463 36.1 1,190,863 -24.3 894,369 0.8
Kuwait 152,884 6.1 309,693 -50.6 249,769 -38.8
Qatar 95,111 3.8 220,522 -56.9 97,567 -2.5
Ecuador 69,331 2.8 72,774 -4.7 18,283 279.2
Oman 48,248 1.9 41,662 15.8 0 n/a
Australia 24,626 1.0 2,559 862.2 3,178 674.9
US 22,450 0.9 80,775 -72.2 70,211 -68.0
Bahrain 15,376 0.6 4,943 211.1 15,645 -1.7
Vietnam 9,689 0.4 8,013 20.9 21,186 -54.3
Other 9,667 0.4 0 n/a 0 n/a
Total 2,497,707 100.0 2,981,128 -16.2 2,338,553 6.8

Supplier Jan-Aug 2023 Jan-Aug 2022 % chg on year
Saudi Arabia 1,022,022 1,052,460 -2.9
UAE 1,009,512 995,918 1.4
Kuwait 239,471 224,531 6.7
Qatar 130,728 218,220 -40.1
US 40,583 14,458 180.7
Ecuador 31,388 53,464 -41.3
Oman 30,830 32,058 -3.8
Bahrain 12,139 30,218 -59.8
Australia 8,971 6,447 39.1
Vietnam 5,001 5,904 -15.3
Other 15,986 88,725 -82.0
Total 2,546,630 2,722,403 -6.5

Source: Ministry of Economy, Trade and Industry