Singapore — The start of the new decade heralds some big changes for Middle East crude flows to Asia.
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The region has long banked on its plentiful oil supply and a convenient geographical location, along with region-specific pricing and long term contracts to lock in revenues from its number one resource: crude oil.
But now, increasing competition from arbitraged barrels and changing appetite for crude feedstock in Asia may force this cluster of oil producing nations out of their conservative shell.
ASIAN BUYERS KEY TO PRODUCERS
In 2020, the Middle East will have to contend with two main competitive threats: the steady availability of foreign crude supply to Asian refiners and the International Maritime Organisation's low sulfur mandate, which is setto kick in from January 2020.
The IMO's low sulfur fuel requirements combined with increasing availability of crude grades from around the world could provide Asian customers a pivot to reduce their heavy dependence on Middle East crude oil in favor of themost competitively priced barrel available on the global crude market.
For instance, China's dependence on Middle East crude has steadily fallen from 52% of its total crude imports in 2015 to around 44% in 2019, according to the country's General Customs Administration data. Middle East crude imports to South Korea have also dropped from 86% of its total crude imports in 2016 to around 71% in 2019, Korea's Customs Service data showed.
Recently, countries as far away as Norway have made it to the top 10 list of crude suppliers to China's independent refineries for the very first time in November. Multiple China-based refiners purchased various grades from the North Sea producer, including its latest offer, Johan Sverdrup.
PRODUCERS WEIGH THEIR OPTIONS
To respond to this competitive threat, the Middle East producers have had to weigh the options available to them, and consider whether to protect revenue or defend their market share in Asia.
Post-IPO Saudi Arabia in 2020 may choose to sacrifice winning greater market share in Asia by way of higher oilproduction, and may instead focus on boosting global oil prices by keeping its oil production lower in 2020.
It has already committed to cut its crude output by an extra 400,000 b/d over January-March 2020 as part of an OPEC+ deal signed off in Vienna this month.
Current prices for Dubai and Oman crude oil -- the benchmark references Saudi crude is priced on -- show a strongly backwardated market structure since July 2017, partly due to the OPEC+ production cuts.
This backwardated structure is highly likely to continue in 2020, as evidenced by Platts Dubai forward curve. The spread was last assessed on December 20 at $7.16/b for January to December 2020. So far, the market's expectationthat the backwardated structure of the Middle East crude market will ease along with a slowdown in demand for high sulfur crudes, has not panned out.
OFFICIAL SELLING PRICES SET TO ALIGN
Another big step in 2020 will be updates to the pricing methodologies of some of the region's producers, which will align Middle Eastern crudes in a directly comparable manner. This will in turn bring greater transparency to andput more purchasing power in the hands of the Asian refiner.
Currently, with the exception of UAE's Abu Dhabi National Oil Company and Qatar Petroleum, all Middle East producers price their oil to Asian customers on a forward month pricing mechanism.
Both state-owned entities have announced concrete plans to do away with retrospective pricing formulas to forward pricing, a move widely expected by the industry to be implemented within the first quarter of 2020.
Additionally, ADNOC announced in November, plans for its flagship crude grade Murban, to be listed on the Intercontinental Exchange in a bid to create a new regional benchmark for light crude in the first half of the year on a new Abu Dhabi exchange in partnership with nine international energy companies. The move will add a new dimension to the dynamics of Middle East crude trading.
"The attraction with Murban is that due to its liquidity and the nature of its pricing and trading cycle, forward trading is very possible and will come about naturally," the head of crude trading based in Singapore said.
"And because of that, a forward derivative market for it could develop with ease. Another benefit is that it iscomparable to the other light benchmarks such as WTI and Brent."
But as of now, market participants are watching with controlled optimism.
While 2019 will be remembered in global crude oil markets as a year of unexpected and high risk events in the Middle East, the year ahead will cement a crucial transition for the world's largest oil producing and exporting region: one where it plays a more proactive, dynamic and global role in shaping oil markets than ever before.
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