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Asian buyers see some support from OPEC+ cut; poor demand to shape broader trend

Highlights

OPEC+ conditionally agrees to cut 10 mil b/d

Asian refiners see output cut insufficient

Asian refiners expect tepid demand to cap prices

Tokyo — Major Asian crude oil buyers expect OPEC's latest move to slash supply to help put a floor on oil prices, but tepid Asian demand fundamentals amid the coronavirus outbreak will likely continue dictating the broader market trend as oil product margins remain poor.

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OPEC and its allies announced a conditional agreement to claw back 10 million b/d of crude production under political and financial pressure, to try and stem a bruising rout in oil prices caused by the coronavirus pandemic.

Under the proposed deal, which is subject to Mexico's consent, the 10 million b/d OPEC+ cut would cover May and June. The cuts would then be rolled back to 8 million b/d for the rest of 2020, and then down to 6 million b/d for all of 2021 through April 2022.

Leaders of the coalition Saudi Arabia and Russia will pick up the pieces Friday at a G20 energy ministerial meeting, as they hope to convince Mexico to rejoin the OPEC+ flock in what would be the largest coordinated production cut in history.

Insufficient cut

"In the short run, a 10 million b/d cut is not sufficient to balance the market," said Alex Yap, senior analyst with S&P Global Platts Analytics. "This means we will run very close to maxing out storage capacity and further cuts from other non OPEC+ producers will be necessary."

In Asia, market participants said that a 10 million b/d production cut would not be sufficient to balance the regional market amid the ongoing demand destruction from COVID-19.

A trader with a Chinese independent refinery said the current crude price level reflects an expectation of a cut of 10 million b/d.

Similarly, a Japanese refiner said that the coordinated production cut of 10 million b/d is not enough to balance the oil market in the face of sharp declines in demand.

NYMEX May WTI settled down $2.33 at $22.76/b Thursday while ICE June Brent slipped $1.36 to $31.48/b, furthering the spread between the two crude grades.

Demand destruction

Industry officials and refinery sources across major Asian consumers said the broader market will likely remain highly sensitive to demand destruction rather than supply fundamentals, at least over the short- and medium-term horizon.

"The OPEC+ move would help support outright prices to some extent but demand destruction would continue to dictate the broader market trend. Big Asian consumers are buying much less with economic activities slowing down ever so rapidly due to the pandemic," a Seoul-based Korea Petroleum Association official said.

A Singapore-based Chinese trader with a state-owned oil company said "the problem is demand, which cannot be solved by cutting supply. Fundamental is bad, a cut can only avoid it getting worse."

South Korea's crude imports tumbled to 86.3 million barrels in February, down 12% on the year, latest data from state-run Korea National Oil Corp. showed.

Japan imported 2.87 million b/d of crude in February, down 7.1% on the year, according to latest data from the Ministry of Economy, Trade and Industry.

China's refined oil product consumption over January-February slumped year on year amid the coronavirus outbreak. According to the latest National Development and Reform Commission data, oil product demand in Asia's biggest energy consumer over the first two months of 2020 dropped 14.1% year on year to 41.94 million mt.

With the number of fresh COVID-19 cases plateauing in China, the country's economic activity has started to resume to support fragile domestic demand.

In a sign of demand recovery, China's planned crude run in April recovered to about 12.5 million b/d, taking nearly two months to reach about 90% of the level in January after falling by about 3.3 million b/d in February, a Platts survey showed.

Middle East OSPs

Asia's lackluster crude oil and fuel demand will likely encourage major Middle Eastern producers to keep their official selling prices attractive, multiple trade sources and refinery officials told Platts.

While the OPEC+ cuts could shore up prices temporarily, weak oil product cracks, record-low physical market structure and declining refinery run rates across Asia would limit any upside to benchmark prices and OSPs, said a trading desk manager at GS Caltex based in Seoul.

Crude buyers in Asia expect heavy cuts to OSPs from producers such as Saudi Aramco, Kuwait Petroleum and others for May-loading cargoes, they told Platts.

"We need to see a cut back in production as spoken about by producers and in Asia we need to see the big OSP cuts as well," a trader said Thursday ahead of the OPEC+ meeting.

Asian oil product crack spreads weakened to record lows this week, a trend that will likely lead to many Middle Eastern crude producers refraining from hiking their monthly OSPs despite the production cut plans.

The FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures was assessed at minus $10.74/b at the 0830 GMT close of Asian trade Tuesday, marking the lowest level since S&P Global Platts began publishing crack spread data in 2007.

Amid the negative key product cracks and sluggish regional demand, refiners in Asia are increasingly cutting runs. Japan's crude throughput fell 3.3% week on week to 2.72 million b/d over March 29-April 4, the Petroleum Association of Japan said. The volume was the lowest in 24 weeks and was last lower at 2.68 million b/d over October 13-19 last year.