Singapore—Term allocation cuts by Saudi Aramco to buyers in Asia were mostly within expectations, although some refiners are likely to supplement supply with crude oil from alternative sources.
Refiners across key Asian economies, namely China, Japan and South Korea, had their term allocations reduced by 10% to 15% for April-loading barrels, according to multiple refinery and trading sources surveyed by S&P Global Platts.These cuts to term supplies is the result of Saudi Aramco's firm commitment to adhere to its unilateral production cut of 1 million b/d in February. A combination of lower exports, refinery maintenance and stock draws further implies that Saudi Arabia has complied with its additional cuts and pumped 8.13 million b/d, a separate Platts survey showed. The producer once again surprised oil markets earlier this month by extending voluntary cuts of 1 million b/d for April.
Earlier in March, delegates to the OPEC+ meeting said this decision was prompted by lingering uncertainty over the economic recovery, which could still be derailed by uneven vaccine rollouts and stringent lockdown measures.
The OPEC+ alliance also displayed remarkable discipline as compliance to production cuts was reported at 113.5% in February. The region's other key producer, Abu Dhabi National Oil Co., has also informed its Asian term customers of a 5% cut in nomination across all grades for April, Platts reported earlier.
Nevertheless, most refiners are unperturbed by these cuts as demand across Asia remains muted amid bloated crude stocks in China and Japan and curtailed margins compelling refineries to opt for downtime.
Additionally, the nomination cuts are unlikely to thrust buyers into the spot market as other sources of crude oil remain viable.
Two Petrochina refinery sources indicated that their planned nomination for April had been cut by 50%, while a source at Sinopec said the refinery is likely to receive less than the 2 million barrels of Arab Medium crude it had planned for.
Among Sinopec's refineries, its Zhenhai refinery was spared of any cuts, while its Fujian refinery -- a joint venture between Sinopec and Saudi Aramco -- will have its planned allocation for April cut by 20,000 mt.
South Korean refiners, on the other hand, have indicated that their term volumes will be cut by around 6%-10% for April-loading barrels, but they are unlikely to increase their spot purchases as demand remains stilted due to the COVID-19 impact on consumption.
Over January-February, South Korea's crude imports fell 15.8% year on year, the fifth consecutive decline since October last year, Korea Customs Service data showed.
COMPETITIVE WEST AFRICAN ARBITRAGEWhile pared term allocations are unlikely to ramp up Asia's spot demand, large unsold stocks of West African crude remain an enticing option for refiners.
"Massive overhang [of West African crudes] is growing... sellers [are] still hoping Asian demand will come up," a crude oil trader based in Singapore said.
To make up for lower term volumes, one PetroChina source said the refinery will consider Ghana's Jubilee crude to supplement its reduced allocation for Arab Light crude.
Sinopec refineries have also shown a strong liking for Angolan grades, as regional sellers struggle with bloated inventories from months of unsold cargoes.
Over the past month, the strong Brent-Dubai spread has made Dubai-linked crudes the cheaper option, although rising official selling prices and spot cash premiums for Middle East crudes have limited buying appetites.
The Brent-Dubai Exchange of Futures for Swaps, or EFS, was pegged at a multi-month high of $3.16/b, the highest since Nov. 19, 2019 when it was assessed at a premium of $3.47/b, Platts data showed.
In recent months, India has been among the front-runners seeking oil beyond the Middle East as the crude oil import-dependent country deals with a recovery in domestic consumption after the relaxation of COVID-19 lockdowns and soaring retail fuel prices.
The country has recently announced plans to import oil from diversified sources as Middle East crude remains expensive due to the extended term cuts.
Indian Oil Corp., the country's largest refiner, has defied stuttering arbitrage economics by importing volumes of West African crude through several tenders issued over the past few weeks.
"India's case is different from the rest due to its location. West Coast India is closer from an arrival point of view, which makes arbs workable," a trader said.
