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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