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Analysis: Asia finds sweet crudes cheaper than Saudi oil amid cautious OPEC+ supply increase

Highlights

Japan, South Korea, Thailand reduce Saudi crude imports, buy more sweet grades

Asian refiners say OPEC+ should ideally raise output by at least 700,000 b/d

Dubai price structure, Saudi crude OSPs on uptrend since late 2020

Several key Asian crude importers have demonstrated a strong preference for sweet crudes offered by non-Middle Eastern suppliers to date in 2021 as import costs for Saudi barrels generally prove higher -- a trend that could continue through to year end unless OPEC+ boosts the scale and pace of its production hike.

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South Korea's imports of crude oil from its top supplier Saudi Arabia fell 23% year on year to 150.24 million barrels over January-July, latest data from state-run Korea National Oil Corp. showed.

However the world's fifth-largest crude importer received 18.9 million barrels of low sulfur crude oil, mostly CPC Blend, from Kazakhstan over the same period, almost doubling from 9.5 million a year earlier.

South Korean refiners also hiked Norwegian crude imports almost threefold to 6.8 million barrels over January-July, and received 11.698 million barrels of US crude in July, up 123.1% on the year and marking the fourth consecutive month of year-on-year increase, KNOC data showed.

Saudi Arabia surrendered its top supplier spot in Japan recently as Asia's third-biggest crude importer cut its July shipments from Saudi Arabia by 20.9% year on year to 735,041 b/d, Ministry of Economy, Trade and Industry data showed.

Japan's Saudi crude imports fell 2.4% year on year to 941,531 b/d over January-July, while its sweet crude imports from Russia rose 13.7% from a year earlier to 30,964 b/d and heavy sweet crude shipments from Ecuador rose 11.9% to 37,520 b/d.

Southeast Asia's major crude importer Thailand also cut Saudi crude imports by 4.7% year on year to 168,082 b/d over January-July and ramped up light and heavy sweet crude purchases from Indonesia almost threefold over the same period to 64,235 b/d, Customs Department data showed.

Pace, scale of OPEC+ output hike

Saudi Arabia continues to risk losing market share in several key markets in East Asia unless the pace and scale of the OPEC+ production hike is revised higher, according to feedstock trading sources at refiners in Japan, South Korea and India.

OPEC and its allies agreed Sept. 1 to hike their collective crude production by 400,000 b/d in October, sticking to their initial agreement reached in July to increase output by the same margin each month from August through to the end of 2022.

However, Asian refiners and trading firms said the pace of that supply hike was slower than desired.

S&P Global Platts surveyed 11 major Asian refiners and trading companies before the July 1 OPEC+ meeting, and they had hoped the producer alliance would return at least 1 million b/d supply to the market in August-September due to the sharp rebound in outright oil prices in 2021.

The most recent survey of eight major Asian refiners including ENEOS, SK Innovation, BPCL, CPC Taiwan and PTT indicated that although the companies had largely anticipated OPEC+ would maintain its gradual production hike stance for October, the group should ideally raise supply by at least 700,000 b/d as Asia generally finds oil prices overheated and some Middle Eastern crude official selling prices rather expensive amid tight supply conditions.

Sweet crudes cheaper than Saudi oil

South Korean refiners paid on average $65.73/b for Saudi crude shipments over January-July and an average $64.18/b for shipments from Kazakhstan, the KNOC data showed.

Light sweet grades from the US and Norway were also more economical than high sulfur Saudi oil. South Korean refiners paid on average $64.86/b for US crudes received in the seven-month period, while shipments from Norway averaged $65.21/b. KNOC's import cost figures include freight, insurance, tax and other administrative and port charges.

Higher costs for Saudi barrels this year reflects strong discipline from OPEC+ in maintaining control over production and exports, refinery and trading sources in Seoul and Singapore said.

The Dubai price structure has maintained a strong premium throughout the year as Middle Eastern sour crude supply remains relatively tight, prompting Saudi Aramco to consistently hike official selling prices for Far East-bound cargoes, said trading sources at two major South Korean refiners, who declined to be identified due to the sensitive nature of the producer-end user business relationship.

Trading sources at several East Asian refiners said they were generally content to exercise the option of utilizing the operational tolerance to lift less Saudi crude as higher quality sweet crudes could currently be purchased at lower prices in the spot market.

Aramco has set its OSP for Arab Light crude loading in September and bound for Asia at a premium of $3/b to Dubai/Oman crude, compared with a premium of 30 cents/b for the grade loaded in January and a discount of 50 cents/b for cargoes loaded in December 2020, Platts data showed.