SINGAPORE: Middle East crude oil producers may be pushed next week to cut term-contracted shipments to customers in Asia, even though demand for high-sulphur or “sour” grades is perking up.
After the Organisation of Petroleum Exporting Countries signed off on its biggest supply cutback this week, the five Middle East Opec members bound by output quotas will be under pressure to toe the line on policy.
Saudi Arabia, Iran, Kuwait, the UAE and Qatar have quotas but not Iraq.
It’s no mean feat for their national oil companies to sell fewer cargoes when prices are falling fast, particularly when revenues are further pressured by a declining dollar value.
And doing so at a time when the global market is watching quota compliance closely – and with Asia’s demand for sour crude firming.
“The oil majors are receiving less, but not us (so far),” an official with a South Korean refinery said of recent term supply cuts.
State-owned Saudi Arabian Oil Co (Saudi Aramco), earlier this month said it will slash January shipments to Asia by 7%-10%, and it appears the biggest cuts were made in supplies to large integrated companies.
Refiners, while still planning to keep crude throughput rates low in the first quarter compared with a year ago, are hoping they won’t be hit as severely, as short-term support for fuel oil, and now gasoil, has lifted nearby margins.
Asia’s reference fuel oil crack, or the discount of Singapore high-sulphur heavy oil swaps to Dubai crude, was valued on Friday about $6.35 a barrel, not far from highs reached in October, a result of steadying fundamentals.
Meantime, the intermonth spread on gasoil has climbed amid a pricing play that’s almost turned a contango structure – where prompt months are at a discount to forward – around.
“These guys are playing for keeps on January gasoil. Regrade is getting trashed,” said a Singapore-based trader.
The situation is quickly being reflected in spot crude trading, a trend traders say is likely to continue into next week.
With the bulk of February-loading heavy sour Qatari cargoes committed, refiners are now buying up medium grades such as Oman and Banoco Arab Medium and may soon switch their focus to light Abu Dhabi supplies.
If the national oil companies at Opec producers were to impose steep term supply cuts, spot valuations are likely to jump.
Abu Dhabi National Oil Co’s (Adnoc) flagship Murban grade, which is high on distillate yield, is pegged about 5¢-10¢ a barrel below the official selling price; it won’t surprise many traders if the market strengthens to a premium before the trading month ends.
So far in 2008, Murban cargoes have traded as high as a 30¢ premium to the OSP to $2.80 a barrel below it – a hefty $1.4mn discount on a single shipment.
To be sure, global oil prices may stay soft despite Opec’s defensive output policy, with an economic slowdown casting a pall over demand growth prospects.
But for the physical markets, with their focus on the short term, buying interest in coming days could be firmer rather than weaker, traders said. – Dow Jones Newswires