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Asian crude oil buyers spoilt for choice amid US/Opec market share tussle – Business News

 

THE settlement price for the September ICE Brent futures contract surpassed a key resistance point at US$50 per barrel (bbl) in the last days of July, after markets consolidated on data from the US, Opec and other non-Opec producers that seemed to hint at a gradual pullback in global oil oversupply.

The front-month September ICE Brent futures contract settled at US$52.52/bbl on July 28, up from US$47.92/bbl on June 30. But other than the upward rally in the last week of July, it traded within a narrow range.

The prompt ICE Brent timespread did flip into backwardation for the first time since Jan 31, and was at a 30 cent/bbl premium to October ICE Brent as of the July 28 settle.

The recent momentum follows Saudi Arabia’s commitment to cap its August exports at 6.6 million bbl/d. Oil prices got a boost from the most recent Opec/non-Opec meeting, a concentrated effort by Saudi Arabia to reiterate their commitment to rein in oil production and exports.

Oil analysts said that the group of oil producers had little choice but to maintain their original oil quotas from the October 2016 meeting as a baseline from which to operate for the rest of the year.

Beyond that, quarterly meetings of the compliance committee and various ministers from the alliance generate about a days worth of cautious speculation but markets are quick to self-correct by refocusing on supply-demand fundamentals.

US production and inventory data remains a key driver of oil prices currently. The state of US oil production, demand and exports have gradually come to the forefront as this year’s swing factor as crude oil markets become increasingly desensitised to the presence of the Opec/non-Opec alliance in cutting production.

As of July 28, the US oil rig count rose by two to 766, according to Baker Hughes, in line with a slowing down of the rapid activity seen earlier this year and sluggish oil prices that appear to have caused upstream operators to rethink at least some drilling plans this year.

The most recent Energy Information Administration data showed that US crude stocks fell by 7.2 million barrels to 483.4 million barrels in the week that ended July 21. US crude stocks have now fallen 25.8 million barrels or 5.1% in the past four reporting weeks.

The EIA also said in its recent monthly report that US oil output averaged 9.22 million b/d in June, down 20,000 b/d from May and only the second month-on- month decline in nine months.

Production is forecast to climb to 9.42 million b/d next month and reach 9.87 million b/d by July 2018, the EIA said.

The complementary factor to US and Middle Eastern production and stockpiles is Asia. As stated in S&P Global Platts analysis earlier in the year, Asia has become the pivotal competing ground for both US and Opec producers hopeful of finding a home for their extra barrels.

Although Asia was always a major export destination for Middle Eastern producers, higher prices for Dubai crude made US West Texas Intermediate and other light sweet US crudes linked to WTI seem economically viable to Asian refiners in comparison to crudes linked to Dubai-based pricing.

In May, Japan imported its first cargo of Mars crude. In fact, Asia has seen many firsts this year in terms of US crude imports that were previously unlikely or unheard of. In early July, UAE’s Abu Dhabi National Oil Company imported its first cargo of US crude, slated by market sources to be Eagle Ford condensate.

Also in July, India’s state-owned refiner Bharat Petroleum Corp Ltd bought 1 million barrels of sour crude from the US for its 190,000 bbl/d Kochi refinery, its first purchase of US crude via tender. This followed a similar purchase of 1.6 million barrels of US crude by Indian Oil Corp (IOC) earlier in the month, also a first for IOC.

Flow of American barrels into the continent might be new for some but is part of an ongoing arbitrage trend this year. In March, two Chinese state-owned oil companies bought 5 million barrels or more of heavy sweet crude from Brazil while a South-East Asian end-user purchased a cargo of US Eagle Ford crude for delivery over May-June.

Not to be left behind, Saudi Arabia and other Middle Eastern producers hiked their exports to the Asia-Pacific region – their largest export destination – by 758,000 bbl/d, or 18%, month on month to 4.883 million bbl/d in June.

That was despite a 9% drop in imports by China, the biggest importer of Saudi crude in May. In June, however, Chinese imports dropped to 931,000 bbl/d, below that of Japan, but imports of Saudi crude jumped 20% to 1.183 million bbl/d.

Saudi Arabia also sold more crude to India and South Korea in June. India’s imports rose 17% month on month to 860,000 bbl/d and South Korea’s by 10% to 818,000 bbl/d.

In Japan, which imported almost 200,000 bbl/d more crude from Saudi Arabia in June than in May, a number of factors in addition to the onset of summer may have helped.

Aside from Saudi willingness to offer a discount on its crude, Japanese buyers, who are always concerned with security of supply, have in the past shown a preference for medium- and long-term contracts. That meshes well with Aramco’s preferred marketing strategy for crude.

A sense in June that international crude prices could be close to bottoming out following Opec’s decision to extend production cuts might have made Japanese buyers even more ready to sign term contracts for Saudi crude supplies instead of bidding on spot cargoes offered by Oman and others.

Similar dynamics may be at play in South Korea, while in India, continued economic growth has driven up fuel demand, pushing up the country’s total imports of Persian Gulf crudes.

In fact, attention on India’s oil and gas sector is coming to light in more ways than one. Since the BJP-led government came to power in 2014, New Delhi has taken some concrete steps to align domestic fuel pricing with market forces.

As a result of deregulation policies and resilient global demand growth, fuel marketing in India has become a profitable business attracting many foreign players.

India’s oil products consumption growth is expected to outpace China’s for the third year in a row.

Indian oil products demand is likely to grow 7% year on year to 4.13 million b/d in 2017, whereas China’s oil demand is expected to rise only 3% to 11.5 million b/d in the same period, according to Platts Analytics.

Eesha Muneeb is S&P Global Platts senior specialist, oil price assessments.

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