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Asian refiners confident of finding Russia crude alternatives but seek OPEC+ supply boost: panel


OPEC+ should ideally raise output by more than 800,000 b/d

Saudi Arabia content with high prices, unlikely to boost supply

Iranian crude not enough to resolve overall tight supply

  • Author
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  • Shashwat Pradhan
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  • OPEC+ Oil Output Cuts War in Ukraine Iran Sanctions

Asian refiners would have little problem sourcing alternatives to Russian crude oil, but end-users hope to see OPEC and its allies more than double the scale of the producer group's monthly production hike due to increasing feedstock cost burdens and faltering oil inventory levels, market participants said at the S&P Global Commodity Insights 9th Asian Refining and Petrochemicals Summit March 15.

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Asia's top crude importers including India, South Korea and Japan are relatively unscathed by Russian supply disruptions in the wake of the Ukraine war and Western sanctions levied against Moscow's financial sector, as the Asian buyers' reliance on Russian crude is relatively low, Hisashi Miyagawa, crude oil trading manager at P66, said during a panel discussion at the S&P Global summit.

As Russian crude makes up around 3%-5% of major Asian economies' overall refinery feedstock imports, finding alternative sources wouldn't be too troublesome, Miyagawa said, indicating that light sweet WTI crude would be one of the top alternative options for regional end-users considering Asian refiners' extensive and well-established US crude trading network.

However, with the current OPEC+ production rate falling short of meeting requirements for adequate global supply-demand balance, rising benchmark oil prices and Middle East official selling prices are a major concern for regional end-users, Jing Zhang, a senior analyst at Unipec, said during the panel discussion.

Asia would love to see the producer group significantly boost the scale of its monthly production hike, Zhang added.

OPEC and its allies are standing firm on increasing crude output quotas by a modest 400,000 b/d each month.

In contrast, nine major Asian refiners surveyed by S&P Global -- including SK Innovation, PTT, BPCL, ENEOS and PetroChina -- in the week of Feb. 27 indicated the producer group should raise supply by at least 800,000 b/d as current oil prices appear too high and consumer sentiment is hurt by prices at these levels.

However, even before the Russia-Ukraine conflict, the monthly OPEC+ hike of 400,000 b/d was not enough and if the group had decided to raise the output by 800,000 b/d, it still wouldn't have been enough to meet the global demand recovery, Zhang said.

Zhang indicated that OPEC's tight supply control and high prices have already led to a sharp decline in China's oil inventory to rather uncomfortable levels.

"China's inventory is really low ... it's already below the five-year average," she said.

In addition, surging feedstock costs threaten Asian refining margins, crude and condensate traders at South Korean, Chinese and Thai refiners said on the sidelines of the Asian Refining summit.

For China's private sector refiners, it's difficult for the companies to fully transfer the rising feedstock cost burden to consumers as Beijing sets caps on retail gasoline and gasoil prices every 10 working days in line with international crude prices, refinery and industry sources said.

If crude prices rise above $130/b, the government typically maintains or limits increments of the retail prices' upper ceiling in a bid to control inflation.

OPEC+ supply expectations

Despite the call for a much sharper increase in OPEC+ production, Asian industry and market participants said they don't have high expectations from major Middle East producers to adhere to Asian customers' desire.

The most recent Saudi Aramco official selling prices and a slew of OSP hikes seen over the past year are a clear indication that the OPEC kingpin would be content to maintain its current production stance, speakers at the panel said.

"While Saudi Arabia would consider Asian [customers'] needs, the probability of a Saudi production increase is really low. Considering the current high prices and high OSP premiums, I don't think they have the motivation to increase output," Zhang said.

It would be quite difficult for OPEC+ to even keep up with its current stance to raise production by 400,000 b/d every coming month as it's somewhat doubtful that the producer group has enough spare capacity to achieve the gradual supply increase, Miyagawa said.

Miyagawa indicated that major Middle Eastern producers are generally content with current high price levels, while smaller OPEC producer members are struggling to meet their output quotas due to the lack of structural investment in their new and existing upstream projects.

"Only the UAE and Iraq may have enough capacity to boost production [beyond their given] output quotas," he said.

Meanwhile, Zhang indicated Unipec remains optimistic that Iranian crude could fully return to international markets this year, though the additional supply from the Persian Gulf producer may not be enough to bring oil prices down sharply.

"We are quite optimistic to see the full return of Iranian oil in the second quarter or third quarter ... we estimate to see around 1 million b/d of Iranian crude in the market by end of the year," Zhang said.

The return of Iranian crude could somewhat ease the prices by around $5/b, but with so many other variable factors including the ongoing COVID-19 cases and Russia-Ukraine tensions, Iranian oil would not be able to completely change the broad supply-demand market fundamentals, she added.