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Analysis: Saudi crude gains ground in Japan amid faltering Asian market share

Tokyo — Saudi Arabia's commitment to the OPEC-led production output cut deal wasconfirmed with reduced exports to key Asian outlets in 2017, but Japaneseimports of Saudi crude jumped to the highest level in 35 years as the kingdomalso maintained its flexibility to meet demand whenever there is a need. Japan's crude oil imports from Saudi Arabia rose 9.5% year on year to1.295 million b/d in 2017, or 40.1% of total imports in the year, and thecountry's imports of Saudi crude in 2017 were the highest since 1982,according to the Ministry of Economy, Trade and Industry data.

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Market sources attributed Japan's increased imports of Saudi Arabiancrude oil in 2017 to a combination of the kingdom's flexibility to respond tomarket's needs as well as economics with competing grades.

"At the end of the day, the Saudi [crude] was easy to take because of itsoperational flexibility, as well as they were basically flexible toaccommodate our request for tolerance," Hisashi Kobayashi, president ofJapanese refiner Cosmo Oil, told S&P Global Platts.

But market sources said that it had become more difficult to seekincremental supplies from Saudi Arabia as it had started cutting monthlycrude term allocation for major Asian importers from around Septemberloadings onwards last year.

Since early in the third quarter last year, major OPEC producersincluding Saudi Aramco and Abu Dhabi National Oil Co. have been consistentlycutting their monthly crude term allocations to various customers in Asia aspart of the OPEC/non-OPEC output cut deal, prompting big Asian consumersincluding China, India and South Korea to look for more reliable supplysources outside the Middle East.

Statistically, Japan's imports of Saudi Arabian crude grades werereflective of the kingdom's sharper decline in terms of production of heaviercrudes. Imports of Arab Extra Light jumped 39% year on year, while its importsof Arab Heavy, Arab Medium, and Arab Light dropped by 11%, 16% and 4%respectively from a year ago, according to METI data.

"While the US and Europe have been destinations for Saudi lighter crudes,the increased production of US shale oil and increased supplies from Libya toEurope have made it easier for the Saudi lighter grades to come to Japanoverall," according to Takayuki Nogami, chief economist at Japan Oil, Gas andMetals National Corp.

The increased flow of Saudi Arabian crude to Japan also comes at a timeof slowing Chinese imports of Saudi crude, coupled with reduced importsfrom India and South Korea.

China's imports of Saudi Arabian crude inched up year on year to around1.04 million b/d in 2017 but its share of the total crude intake fell to12.4%, down from 13.4% in 2016, according to the General Administrationof Customs data.

India imported a total of around 716,000 b/d of crude oil from SaudiArabia in 2017, down about 13% from the 820,000 b/d imported in 2016, S&PGlobal Platts trade flow software cFlow showed. South Korea's crude importsfrom its biggest supplier Saudi Arabia slid 1.6% year on year to around875,000 b/d in 2017, data released by state-owned Korea National Oil Corp.showed.

LOFTY RUSSIAN PREMIUMS Spot premiums for various light and medium sweet Russian grades had beenwell supported throughout 2017 due largely to China's relentless appetitefor crude oil produced in the non-OPEC state.

Russia in fact was crowned as the top crude supplier to China for thesecond year running in 2017, with a 14% year-on-year increase in volumeto around 1.2 million b/d, the Chinese customs data showed.

Accordingly, Japanese refiners could have resorted to Saudi Arabia foralternatives to lighter Russian grades including ESPO Blend, Sokol andSakhalin Blend.

"Independent Chinese refiners being allowed to import crude oil led tothem bidding up Russian crudes from the ESPO pipeline," said FareedMohamedi, chief economist for consultancy Rapidan Energy Group.

"Japanese refiners felt ESPO prices had gone too high relative to otheralternatives like Murban and Arab Extra Lite," said Mohamedi, a corporateadviser to Saudi Aramco until mid-2016. "The Saudis were happy to obligeand will continue to do so in 2018.

"It was all demand driven and later the Saudis realized it was a goodmarket to capture," he added.

ESPO Blend crude was among the most expensive grades in the Asia Pacificsweet crude market during the second half of 2017, with the spot differentialfor the medium sweet Far East Russian grade riding a steady and sharp uptrendfrom a premium of 95 cents/b to Platts Dubai seen in May to a premium of$4.80/b in December 2017.

In comparison, monthly official selling price differentials for ArabExtra Light crude were less intimidating for Asian buyers last year. SaudiAramco had set the monthly OSP differentials for the light sour grade between$0.40-$2.45/b to the Platts Oman and Dubai average during January-Decemberlast year.

"My rough calculation is that ESPO was [on average] around $2-$3/b moreexpensive than Extra Light on FOB basis," said a trading manager at aJapanese firm.

-- Takeo Kumagai, takeo.kumagai@spglobal.com

-- Gawoon Philip Vahn, Philip.Vahn@spglobal.com

-- Edited by James Leech, newsdesk@spglobal.com