The historic discount that Asian buyers have enjoyed on heavier crudes has evaporated recently as such grades become scarcer, but it may just be that the answer lies in more light oil.
Prices for heavier grades of crude have risen faster relative to light oils in Asia as the market tightens amid renewed U.S. sanctions against Iran, the ongoing political disintegration of Venezuela, and production curbs by OPEC and its allies.
These involuntary and voluntary cuts have removed several hundred thousand barrels per day (bpd) of mainly heavy crude from the market, and it’s likely that more volume will be lost in coming months.
OPEC’s seaborne exports dropped to 23.65 million bpd in February from 24.08 million bpd in January, according to data compiled by Refinitiv.
Venezuela’s exports slipped by 540,000 bpd and Saudi Arabia’s by 140,000 bpd, the data showed.
The data also showed that Venezuela’s exports are likely to drop a further 250,000 bpd in March, Saudi Arabia’s by 440,000 bpd and Iran’s by 540,000 bpd.
While Saudi Arabia exports several different grades of crude, Venezuela and Iran are largely shipping heavy, sour crudes that have been sought after by complex refineries in Asia, which are able to process these grades into higher value products such as diesel.
The loss of heavy cargoes has boosted the price of these grades against light crudes, such as the global benchmark Brent.
The Brent-Dubai exchange for swaps, which measures the difference between physical Brent and Dubai cargoes, was at 40 U.S. cents a barrel on Tuesday, close to the 17 cents seen on Feb. 14, which was the lowest premium for Brent in nearly nine years.
As recently as late April last year Brent commanded a premium of $4.64 a barrel.
The rising cost of heavy crudes relative to their lighter counterparts, such as Brent and U.S. shale oil, has been seen by analysts as a problem for Asia’s refiners.
Many Asian refiners invested in expensive upgrading units in order to take advantage of the traditional discount enjoyed by heavy crudes, so that they could buy relatively cheap oil and still get a valuable slate of products.
While they may take the view that the current strength of heavy crudes is a temporary phenomenon, they may also be tempted to increasingly switch to a lighter slate of crudes.
ASIA NEEDS LIGHT CRUDES?
The International Energy Agency (IEA) said this may already be happening, noting in its five-year outlook, released on March 11, that South Korea has moved to lighter crudes on average over the past 10 years, partly because these grades deliver more naphtha, a key feedstock for the country’s petrochemical industry.
The IEA’s view is that Asia is likely to be structurally short of light distillates in coming years, mainly because of rising demand for naphtha, but also for gasoline as more consumers moves into the middle class and buy cars.
This means that Asian refiners may be increasingly tempted to buy more light crudes in order to maximise the production of naphtha and gasoline, while still getting good volumes of middle distillates such as diesel and jet kerosene.
This would make the United States perhaps the ideal supplier to Asia, especially since its exports will rise along with its output, which the IEA expects to grow by 2.8 million bpd by 2024 to 13.7 million bpd.
Asia is already taking more U.S. crude than any other region, with Refinitiv vessel-tracking and port data showing the world’s most populous continent imported 956,000 bpd from the United States in the first two months of 2019.
This was more than the 651,000 bpd taken by Europe and the 156,000 bpd imported by South America combined.
It’s also worth noting that the strength of U.S. exports to Asia was achieved without top importer China, which bought only one cargo in the first two months as the ongoing trade dispute with Washington continues to stymie crude flows.
In the first half of last year, before the Sino-U.S. trade dispute sparked a series of tit-for-tat tariffs, China imported 344,000 bpd from the United States.
It’s likely that if Beijing and Washington can strike a deal, it will include a commitment by China to ramp up purchases of U.S. crude.
With Asia likely to be the biggest centre of crude demand growth, there is a chance that much of its additional oil needs will come from the United States, and this may lead to some of the region’s refineries changing the way they operate.
The opinions expressed here are those of the author, a columnist for Reuters.