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Analysis: Asia's search for alternatives to Saudi crude may widen light/heavy price spread in Q4

Singapore — The apparent shortage in supply of light Saudi crude to Asian refiners has boosted demand for distillate-rich grades in the global spot market, setting the tone for light/heavy crude price spreads to widen in the fourth-quarter.

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Saudi Arabia has been using its vast crude inventories to offset some of the lost production and meet its customers' demand since the attacks on core Saudi oil facilities, which temporarily took some 5.7 million b/d offline on September 14.

Although multiple Saudi crude customers in South Korea, India and Japan claimed that their Saudi term crude supply remains safe, many other refiners in Asia have said that some of their term barrels for lighter Saudi grades have been affected by the attacks.

In China, for one, at least three state-run refineries expect either delays or reduction in light sour Saudi crude shipments in Q4 due to the recent output disruption, refinery sources with direct knowledge of the matter told S&P Global Platts previously.

A refinery in South China operated by state-run Sinopec told Platts that it received a notice from Saudi Aramco stating that it was unable to supply Arab Extra Light crude, and that the Chinese refiner's monthly contractual Arab Light crude supply will be switched to Arab Heavy as a substitute grade for September loading.

In addition, "Arab Extra Light, due for October loading, will be replaced by Arab Medium," a company source said.

"The Arab Light and Arab Extra Light will be generally switched with Arab Medium/Heavy, but this will also depend on the needs from the refinery," a source at another Sinopec-operated refinery in South China said.

Related factbox: Attacks on Saudi oil units affecting major Asian crude buyers differently

SPOT MARKET

Asia was quick to respond to the growing uncertainty over Arab Light and Arab Extra Light crude supplies, with Southeast Asian refiners among the first group of buyers to secure alternative light oil cargoes from the spot market.

Malaysia's Petronas recently bought a total of 4 million barrels of Abu Dhabi's light sour Murban crude via a spot tender, marking the state-run oil company's biggest monthly purchase of the light sour grade.

The eight 500,000-barrel cargoes were heard sold by various Murban suppliers, at premiums ranging from $1/b to $1.50/b to the Murban official selling price, Platts reported previously, citing multiple sources with knowledge of the deals.

The OSP differentials are considerably higher than the last Murban deal heard done for November-loading barrels, which was reported at a premium of around 40 cents/b over the OSP earlier in September.

"Shocking price, but due to [the] lack of light [Saudi] grades, some players have no choice [but] to buy Murban," a sour crude trader based in Singapore said.

Elsewhere, Vietnam's state-run Binh Son Refining and Petrochemical Co. snapped up 2 million barrels of WTI Midland crude for Q4 delivery.

As rival Northeast Asian importers actively picked up both sour and sweet spot crude cargoes from a wide variety of sources to cover any potential shortfall in Saudi term supply, Hanoi decided to act quickly to secure its own requirements, market participants said.

BSR, the operator of Vietnam's 148,000 b/d Dung Quat refinery, will receive a cargo carrying 1 million barrels of the light sweet US crude in October and another cargo in December, a senior company official told S&P Global Platts.

Light-Heavy crude price spreads

LIGHT/HEAVY SPREADS

Asia's pent-up demand for lighter crude grades following the Saudi oil attacks could put the brakes on the substantial contraction in the light/heavy crude price spreads, at least in the near term.

The outright price spread between Abu Dhabi's light sour Murban crude and Iraq's heavy sour Basrah Heavy narrowed to a record low of $2.35/b on August 19. However, the spread staged a sharp rebound this week, settling at $4.60/b Tuesday, Platts data showed.

The outright price spread between WTI MEH (Magellan East Houston) and Abu Dhabi's medium sour Upper Zakum crude, both on an Asia-delivered basis, averaged $1.97/b to-date this month, higher than the August average of $1.59/b, $1.21/b in July, $1.49/b in June and $1.53/b in May.

In addition, the spread between the official selling price of Arab Extra Light and Arab Heavy could widen in the coming months if Chinese end-users continue to face shortage of lighter-end Saudi term crude supply, according to multiple refinery and trade sources surveyed by Platts.

Reflecting the ample light-end crude supply and tightening availability of heavy-end oil, the spread between Aramco's OSP for its Arab Extra Light crude and Arab Heavy crude bound for Asia tumbled to $1.05/b for cargoes loading in September. This marked the narrowest spread between the light and heavy Saudi crude OSPs since 80 cents/b in August 2003.

However, the spread had recently widened to $2.55/b for cargoes loading in October.

Light-Heavy Saudi crude OSP spread

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

-- Eesha Muneeb, eesha.muneeb@spglobal.com

-- Analyst Daisy Xu, daisy.xu@spglobal.com

-- Ada Taib, ada.taib@spglobal.com

-- Edited by Norazlina Jumaat, norazlina.jumaat@spglobal.com

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