Saudi Arabia caps crude supply to Asian refiners as demand surges

Singapore (Platts)--23Apr2015/453 am EDT/853 GMT

Saudi Arabia has imposed limits on supply volumes since March for Asian buyers who have been flocking to the kingdom for more oil after it cut official selling prices to record lows, several industry sources said this week.

While the cuts to OSPs have had the desired effect of driving up demand for Saudi oil, the move suggests the kingdom may have underestimated Asia's appetite.

Alongside the volume restrictions that came into force last month, the kingdom has also boosted production to over 10 million barrels/day since March as it strives to meet demand.

Refiners in China, Japan, Taiwan and Thailand said they were not able to maximize purchases from Saudi Arabia because of restrictions on the use of flexible operational tolerance that is typical in term contracts, while some said they had to absorb slightly lower volumes within the negative tolerance limits.
"[For us it's] not negative, I guess because [there would be] a lot of dead freight, so we need to fight hard but we definitely won't be able to get positive," said a trader with a North Asian refiner, referring to the operational tolerance limits that can be 10% above or below contracted volumes.

Traders said the restrictions were likely limited to particular grades including Arab Heavy and Arab Extra Light as demand for these rose in recent weeks on the back of strong fuel oil and naphtha cracks.

Supplies of Arab Light were seen to be normal, traders said.

The tightening began in March when demand for Saudi oil surged on record low OSPs. Saudi's March OSP differentials for Arab Extra Light and Arab Light were the lowest since at least 1989, according to Platts data, while Arab Medium was priced at its lowest level since mid-2008. By March, a steep contango market structure in Dubai crude was already driving up demand from companies looking to store oil in the hopes of selling it later at a higher price.

"In January, everyone wanted to take a position because of the contango, March-loading spot was tight and if they considered price, Saudi looked cheap," said a second trader with another North Asian refiner.

LOW OSPS, STEEP CONTANGO DRIVE DEMAND

Traders said the combination of low OSPs and a steep contango drove up demand for oil supplies from Saudi Arabia, which had been cutting prices steadily since last June to grow its market share amid a global oversupply.

Oil prices also began the plunge from around $115/b in mid-June last year.

The fall accelerated after OPEC's Saudi-driven decision in November to maintain official crude output at 30 million b/d rather than to reduce production -- as some members had wanted -- in the hope of halting the slide.

On March 23, Saudi oil minister Ali Naimi said the kingdom had ramped up crude output to around 10 million b/d and was ready to meet increased customer demand "at any time."

The country has told OPEC its crude production rose to a record 10.294 million b/d in March from 9.636 million b/d in February, a month-on-month increase of 658,000 b/d, the oil producer group's latest monthly oil market report showed this month.

Refiners contacted in India and South Korea said they had received their full base volume allocations, without elaborating on whether they faced restrictions on tolerance.

One Southeast Asian refiner said the company was receiving minimal volumes and delayed nominations in April.

Since March, state-owned Saudi Aramco has raised its OSP for Asian buyers twice; for April- and May-loading cargoes. But traders said its crude still looked relatively cheaper than rival grades, supporting demand from Asian refiners.

The restrictions on tolerance have spilled over to April.

As a result, Asian refiners, buoyed by healthy margins, have been lapping up spot cargoes from elsewhere, driving up their differentials to the highest in months.

Grades from Abu Dhabi's Murban to Qatar's Al Shaheen traded at sharply higher levels in April compared with March.

The market has seen further tightening on an increase in Chinaoil's buying of June-loading spot cargoes in the Platts Dubai Market on Close assessment process.

The trading arm of PetroChina's parent China National Petroleum Corp. has so far bought 26 June-loading cargoes in the Dubai MOC process, equivalent to 13 million barrels of oil.

--Gurdeep Singh, gurdeep.singh@platts.com
--Ada Taib, ada.taib@platts.com
--Takeo Kumagai, takeo.kumagai@platts.com
--Edited by Wendy Wells, wendy.wells@platts.com

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