Major state-run and private refiners across Asia are planning to trim their term crude oil purchases but conduct more spot market trades in 2022 in an effort to flexibly manage both global demand and supply risks that could emerge and evolve during the prolonged coronavirus pandemic.
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Refiners across Northeast, Southeast and South Asia were generally cautiously optimistic that regional oil demand would extend the recovery trend in 2022. However, taking uncertainties over the impact of omicron variant and the overall unpredictable nature of the pandemic into consideration, the end-users were broadly hesitant to over-commit to fixed-term crude supply deals.
10 feedstock managers and traders at eight major Asian refiners including ENEOS, BPCL, SK Innovation, Idemitsu, PTT and PetroChina surveyed by S&P Global Platts in the first week of 2022 indicated that the companies would prefer to procure more crude and other refinery feedstocks from the spot market, rather than relying heavily on fixed-term supply deals.
"By allowing more room for spot crude purchases, this would enhance trading flexibility and [help refiners] quickly adapt to highly volatile global supply-demand fundamental changes," said a feedstock management source at an Indian refiner, who declined to be identified due to the sensitive nature of corporate trading relationships.
"End-users are generally cautious not to over-commit to fixed-term deals because another wave of major setback in global demand would lead to a massive stockpile of unwanted crude oil," a crude and condensate trading manager at a major South Korean refiner told Platts previously.
In general, Northeast Asian and Indian refiners typically procure around 20%-30% of their monthly crude requirements from the spot market, at least 60% from fixed-term supply contracts, while a small portion is covered by their overseas upstream equity barrels.
Six of the eight refiners surveyed indicated that the companies may opt to raise the spot procurement proportion by more than 5 percentage points and possibly more in 2022, depending on the regional oil demand trend, OPEC+ production strategy and Middle Eastern official selling prices.
Making room for Iranian supply
Despite the standstill and little progress in Iranian nuclear deal negotiations, Asian refiners were also looking to leave plenty of room for the potential return of Iranian crude and condensate.
"It's still a big 'If' scenario, but this is another reason not to commit heavily to fixing large volumes of term supply deals because you would not want to be sitting on expensive long positions when highly economical Iranian barrels become available," said a condensate trading manager at a South Korean petrochemical company.
Although Washington-Tehran talks over restarting the Iran nuclear deal ended without progress Dec. 3, Asian refiners said they remain hopeful that Iranian supply would eventually return to international markets in 2022.
Out of the eight major Asian refiners surveyed, four expect Iranian crude trades to resume by no later than end of third quarter, while two companies see the full return of Iranian supply before the end of first half.
"Iran could be a huge game changer in the market in 2022 ... it's crucial to maintain a flexible [crude] import and trading strategy to take full advantage of any surprise situation like possible resumption in Iranian oil exports," said a sour crude and condensate trader at a Japanese refiner.
S&P Global Platts Analytics expects Iranian oil supply to increase by 1.4 million b/d by December 2022 if a deal is reached and US oil sanctions are removed in the second quarter.
However, those barrels would disappear from global oil supply outlooks if no deal is reached, potentially pressuring declining international stocks and OPEC+ spare capacity by Q3, Platts reported previously.
Expensive Middle East OSPs
The survey participants unanimously agreed that major Middle Eastern official selling prices appear too expensive, encouraging the end-users to explore more economical options in international spot markets outside the Persian Gulf region.
"If the market in the past two years have taught us anything, it's that prices and market structures can flip at any one moment," said a senior crude trader at a major Thai refiner. "That's why it's rather dangerous to commit to any medium to longer-term deals in times of volatile prices and there are plenty of cheaper spot purchase available in the Americas."
Saudi Aramco boosted its Asia OSP for Arab Medium crude for loading in January by 70 cents/b from its December price to a $3.05/b premium to the monthly average of Oman/Dubai, marking the highest ever OSP price differential for the heavy sour grade, Platts data showed.
A sharp decline in Dubai price structure during December could lead to a round of Middle Eastern OSP cuts for February-loading cargoes, but the scale of the price cuts could be limited as OPEC and its allies maintain a tight supply strategy, while the producer group appear confident that the impact of omicron on Asian demand would be limited, industry and trading participants said.
Asian refiners believe the global crude supply remains very tight and outright oil prices overheated. The end-users are continuing to call for the OPEC+ to raise supply by at least 800,000 b/d, doubling the producer group's current stance to increase output by a modest 400,000 b/d.