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Asian refiners unhappy with OPEC+ supply, expect Iranian crude to balance market

Highlights

High oil prices hurt Asian consumer sentiment

Asian refiners expect prices to fall to around $70/b if Iranian supply returns

Iraq's SOMO confident about its strong Asia customer base

Asian refiners remain largely dissatisfied with OPEC's cautious approach in raising crude supply as they believe high oil prices would endanger regional consumer fuel demand recovery, with industry participants widely pinning their hopes on Iranian barrels to return by no later than second quarter 2022 to help tame the inflated prices.

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OPEC and its allies stuck to their original plan to increase crude oil production in November by just 400,000 b/d at the Oct. 4 meeting, but trading, marketing and operation sources at nine major Asian refiners surveyed by S&P Global Platts -- including BPCL, Petronas, ENEOS, SK Innovation, PetroChina and PTT -- said the producer group should ideally raise supply by at least 800,000 b/d as current oil prices appear too highand Asian consumer sentiment is hurt by prices at these levels.

Platts assessed international physical sour crude benchmark Cash Dubai at $80.54/b Oct. 6, the first time it has crossed the $80/b mark since October 2018.

Higher oil prices can work in favor of refiners' balance sheet as the companies could lock in inventory gains since they had bought crude oil that is currently in their stocks at lower prices, while outright product prices would also rise in tandem with benchmark crude markers.

However, the survey participants warned that refiners can only sustain such profitability and margins when backed by healthy consumer demand and economic growth.

The rising oil prices are placing a serious strain on consumer spending with pump prices hitting multi-year highs across major Asian cities in recent weeks. The broad rally in energy and commodities prices are accelerating the rise in consumer price index, a big risk to demand recovery, according to fuel distributors and middle distillate marketers at Indian, Thai and South Korean refiners.

Iranian comeback

With OPEC+ seemingly hesitant to accelerate the pace and scale of its crude production hike strategy, Asian refiners expect Iranian supply to return to international markets as early as the end of the year and no later than Q2 2022, and potentially bring benchmark oil prices below $70/b.

Out of the nine major Asian refiners surveyed by Platts, three expect Iranian crude trades to resume by December, while four companies see the full return of Iranian supply by Q1 2022 and two expect May-June 2022. Six survey participants also indicated that the return of Iranian barrels could bring benchmark prices down to around $70/b, if not lower.

Some major Middle Eastern producers are also cautiously expecting Iranian barrels to flood the Asian market within the next several months. Iraq's State Oil Marketing Organization, or SOMO, tipped the resumption in Iranian crude trades as soon as an agreement to renew the nuclear deal is reached with the US and European Union, which it expects before the end of the year.

"I see all inclined for an agreement to be finalized before the end of this year, if it happens, then there will be a gradual increase in Iranian production and exports," SOMO's deputy director general for crude oil and gas affairs Ali Nazar Faeq Al-Shatari told Platts.

Platts Analytics said the US and Iran could reach a deal in Q1 2022 after lengthy nuclear talks and negotiations, with Iranian barrels potentially returning to international markets by April 2022, though the possibility of no deal materializing cannot be ruled out.

Asia wants suppliers to compete

Asian refiners indicated that the return of Iranian supply could change the OPEC+ mindset and spur new competition, especially among Middle Eastern producers, for a piece of Asian demand.

"Before the sanctions, Iranian crude and condensate were among the most economical and competitive grades... South Pars condensate for example, typically traded at a discount of $3/b or more to Qatari and Australian ultra-light crudes [before the sanctions]," said a feedstock trading manager at Hanwha Total.

SOMO's Al-Shatari also indicated that Iran, just like any other supplier, had the right to gain back its market share.

"It is an economically based market... every producer shall have the right to have a share in it. It will definitely be achieved on account of other suppliers if it can prove its competitiveness, reliability and sustainability over other available crudes in the market," Al-Shatari said.

SOMO remains confident that Asia's fondness for Iraqi Basrah crude grades would continue regardless of the return of Iranian barrels as the relationship the producer has built over decades with Asian customers is strong enough to not be easily broken, he added.

State-run Indian and Chinese refiners, as well as major South Korean crude importers also agreed that Basrah Light, Medium and Heavy grades are their staple feedstock options and their reliance on Iraqi sour grades would remain high for the next decade.