Asia’s demand for Middle East oil undimmed by Abqaiq attack

A damaged installation in Saudi Arabia's Abqaiq oil processing plant is pictured on September 20. Afp

Asia has become a key arena for Middle East and US crude suppliers. With Asian refiners diversifying in the face the greater geopolitical risk and more crude options, power has shifted.  Opec’s dominant oil producers cannot just rely on their unparalleled reign of heavy sourer crudes and will have to learn to manage the new reality.

Opec Secretary General Mohammed Barkindo was keen to point out that the Middle East would hold its position as the main crude oil supply source to Asia ahead of his video address to delegates at the S&P Global Platts Asia Pacific Petroleum Conference in Singapore this month.

“Of course, with the increase in US production, the US has become a new exporter to Asia, with currently over 1 million barrels per day (bpd) in crude exports; however, US export levels still remain far below levels seen from the Middle East," Barkindo told Platts.

But, was he just talking a good game? It’s true Asian refineries tend to be more sophisticated and complex -- better equipped to handle heavier sourer crudes which tend to be cheaper and supplied in large part by Opec’s Middle East contingent and pre-sanctions Venezuela. Indeed, it’s this ability to strip out sulfur that puts them well placed to create the valuable lighter products in line with International Maritime Organisation 2020 rules for cleaner shipping fuels.

However, they also need to blend these crudes with higher specification grades that have less sulfur and these come at a premium. And that’s why crudes from both the Permian and Saudi Arabia’s Ghawar field increasingly sit side by side in the Asian refiners’ shopping basket. US crude has become a regular part of the diet, with a sharp increase in demand this year from South Korea, Taiwan, India and Thailand as they reduce their dependency on the lighter, sweeter comparable Gulf crudes.

South Korea's US crude oil imports, especially, soared above 75 million barrels in the first seven months of 2019 from less than 20 million barrels a year ago. The country became the region’s biggest buyer of US barrels this year. Asian refiners have spread their risks amid growing concerns over potential supply disruptions. The attack on Saudi Arabia’s nerve centre, the Abqaiq processing facility which handles 50 per cent of the kingdom’s crude production, is the latest in a growing wave of security of supply concerns in the Middle East.

And Asian refiners could soon become spoilt for choice of the sweet stuff. New pipeline connections from the Permian Basin are expected to become operational over the next six or seven months adding 2 million b/d of takeaway capacity. Platts Analytics sees US crude exports doubling by the middle of the next decade as unconstrained US production keeps breaking its own records. Meanwhile, Opec and non-Opec producers continue to manage the oil market through their 1.2 million bpd production cut deal through to the end of the first quarter of 2020 at least and show little sign of wavering – a policy they may have to maintain for as long as US shale thrives.

But there is only so much sweet crude these refiners can take. Take South Korea for instance, where refineries are designed to process mainly medium sour Middle Eastern oil.  Moreover, the share of Middle East crude exports to Asia remained around 60 per cent in 2018, unchanged from the level before the Opec alliance with Russia and other producers outside the group started in 2017. So while the market share battle hots up for premium grades pushing up the price, Opec can breathe a little easier on the heavy sour front.

Delegates at the Annual Asia Pacific Petroleum Conference (APPEC) brought the debate squarely back to price, as refiners look for the best and most-economical grades that give the best margins. Restricting supply of Middle East crude grades may support prices but Asian refiners may begin to reassess the value of taking heavier sourer crudes as margins come under pressure. Indeed, many refiners have been looking to make upgrades and change configurations to take advantage of the US shale export revolution and its light sweet crude, they noted.

Considering the rapidly improving US crude export infrastructure and tightening heavier crude supply amid Opec output cuts, as well as sanctions on Iran and Venezuela, the light and heavy crude differentials should soon be "trading close to parity," said Harry Tchilinguirian, head of commodity research and senior oil economist at BNP Paribas said during APPEC.

The Brent/Dubai Exchange of Futures for Swaps—a key price indicator that often serves as a barometer of general strength in the lighter and sweeter crude complex over heavier Gulf grades—has averaged $2.05 per barrel to date this year, lower than $2.93 in 2018, Platts data showed.

That should serve as a warning that Opec and, the Middle East in particular, cannot rely on Asian demand for its heavy sour crude. It’s more complex than that especially if the margins don’t work.

Paul Hickin is head of oil EMEA at S&P Global Platts