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Analysis: Asia remains cautious not to overcommit on crude imports after OPEC+ eases output cut

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Tokyo — Middle Eastern sour crude supply is expected to increase from August after OPEC+ members on July 15 pared back their production cut commitment, but Northeast Asian refiners are determined not to abruptly boost crude imports and refinery run rates as fuel demand recovery remains fragile across Asia.

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The 23-country OPEC+ coalition enacted a 9.7 million b/d production cut accord in May in response to the coronavirus crisis, but will roll the deal back to 7.7 million b/d in August through to the end of the year, maintaining the terms of the agreement laid out in April.

However, this will not result in an immediate boost in crude throughput and oil products output because fuel demand recovery remains fragile and South Korean refiners' main focus is to keep the supply-demand balance stable, said marketing and trading managers at GS Caltex and SK Innovation.

South Korean refiners would be cautious about not overcommitting to crude procurement, crude distillation unit run rates and oil products output, said a market research manager at Korea Petroleum Association based in Seoul.

Similarly, Japanese refiners will maintain their vigilance about crude procurements in coming months, in spite of the recent recovery in domestic oil products demand, amid rising concerns over the growing number of new coronavirus cases, according to company sources.

"Although domestic and international petroleum demand is gradually moving toward recovery, we will continue closely monitoring the supply and demand situations because of the recent increase in new [COVID-19] cases in Japan," an Idemitsu Kosan spokesman said.

"Demand recovery isn't quite there and refineries in China are still running at low run rates. I feel that it [the supply/demand balance] could somewhat be balanced out even with cuts down to 7.7 million b/d with China not looking to take a lot of PG crudes going ahead for this year," a Middle Eastern crude oil trader based in Singapore said.

Uncertainty continues to surround the pace at which regional demand for transportation fuels is set to recover in Northeast Asia, especially in the face of a potential second wave of coronavirus and China's dampened appetite amid high stock levels.

DEMAND FRAGILE

"China's crude demand is weakening with record high inventory in both crude and products amid heavy floodS after COVID-19," a Singapore-based crude trader with a Chinese state-owned firm said.

"China does not need additional barrels for September, instead it has to destock and digest the heavy arrivals in May-July," a Beijing-based analyst said.

China's crude oil imports surged 34.4% year on year to hit a record high of 12.99 million b/d in June, official customs data showed. The volume was set to remain high in July due to ongoing congestion in Chinese waters as the country has rushed to buy cheap crudes since late-March.

The country's domestic demand for gasoil and gasoline had returned to near pre-lockdown levels by May. However, state-run and independent refiners remain cautious not to tilt the supply-demand balance as the market is slated to face demand headwinds from severe floods and heavy rain curbing transportation and industrial fuel demand this month, industry officials based in Beijing and Shandong province said.

South Korea's domestic gasoline demand rebounded to 7.81 million barrels in May from 6.58 million barrels in April and 5.79 million barrels in March. However, its monthly motor fuel consumption is unlikely to recover above 8.2 million barrels as long as the pandemic persists, according to traders and fuel marketing sources at major South Korean refiners SK Innovation, S-Oil Corp., GS Caltex and Hyundai Oilbank surveyed by S&P Global Platts.

In Japan, weekly domestic gasoline shipments were estimated to have risen above the pre-state of emergency level of 4.72 million barrels in recent weeks, following the lifting of nationwide lockdown measures on May 25, according to Platts calculations based on the Petroleum Association of Japan data. However refinery runs remain hovering around 60% of the installed 3.52 million b/d capacity, according to the PAJ data.

MARKET REBALANCING

Saudi energy minister Prince Abdulaziz bin Salman said July 15 that the pared back OPEC+ cuts from August would actually be larger than 7.7 million b/d, since countries that exceeded their quotas in May and June have agreed to make extra compensation cuts in the third quarter.

An OPEC+ document seen by Platts shows that 13 countries pumped above their quotas in the first two months of the deal by a combined 840,000 b/d which, if fully accounted for with compensation cuts, would offset a significant chunk of the coalition's scheduled production increase.

"With the recovery of demand from the April lows, the increase of official production quotas by OPEC+ benefits Asia in general, which relies on the Middle East heavily for its crude oil demand," said Kang Wu, head of global demand and Asia at S&P Global Platts Analytics. "The OPEC+ decision will help rebalance the global oil market and keep oil prices within a certain range, a move welcomed by most oil importing countries in Asia."

Oil futures markets edged lower in Asia trade July 16 following the OPEC+ Joint Ministerial Monitoring Committee meeting. At 3 pm Singapore time (0700 GMT), ICE Brent September crude futures were down 36 cents/b from the July 15 settle at $43.43/b, while the September Dubai swap was pegged down 24 cents/b over the same period at $42.73/b.