Asia's love for non-OPEC+ crudes set to deepen as output expands

Asia may further diversify its crude supply basket, as non-OPEC+ producers boost output in 2024, but rising freight costs and turbulence in some shipping routes pose challenges to regional inflows, analysts told S&P Global Commodity Insights.

With the tug-of-war for Middle Eastern crudes expected to continue due to the ongoing Russia-Ukraine war, many Asian buyers are already exploring alternate supplies from the United States, Brazil, Canada and Guyana -- countries which are witnessing a higher production trend.

"Asia stands to benefit from rising non-OPEC oil production as the increase will raise global oil supply, prompting more oil to flow to Asia. Many Asian countries already import oil from non-OPEC+ countries directly -- so more the merrier," said Kang Wu, global head of oil demand research at S&P Global.

The International Energy Agency said earlier in February that with stronger-than-expected output from key American producers this year, it now expects global oil supplies to average a record 103.8 million b/d in 2024, an upward revision of 250,000 b/d from the previous month's report.

Combined, the US, Brazil, Guyana, and Canada are forecast to add 1.4 million b/d of new oil production. All non-OPEC+ producers altogether are set to add 1.6 million b/d, according to the IEA.

"Non-OPEC+ oil production is increasing and can be useful if more supply can bring prices down for countries like India," said Vibhuti Garg, director for South Asia at the Institute for Energy Economics and Financial Analysis.

Refinery economics

Analysts also anticipate some challenges for refinery economics while processing newer crudes.

"With the ongoing Red Sea crisis and other geopolitical uncertainties at choke points, Asian buyers have to pay a higher cost, including freight, to access these additional oil supplies. In addition, taking into account Asia's existing refinery sophistication and desire for heavy and sour crudes, not all oil from non-OPEC+ crudes will be suitable. As such, refining economics in Asia may be negatively affected," Kang added.

About 75 million barrels of oil will be rerouted around Africa and added to inventories at sea following the turbulence in the Red Sea region, S&P Global estimates. This equates to an uptick of $3-$4/b based on historical price and inventory relationships, but any escalation could add more to the value.

The diversification efforts of key Asian buyers, such as India and China, continued last year and analysts believe the trend will remain intact in 2024.

China imported 5.245 million b/d of Middle Eastern crude in 2023, down 2.4% from 2022, data from General Administration of Customs showed. Middle Eastern crude share in China's total import basket fell to 46.3% in 2023, from 52.7% in 2022, with Russia being the top Chinese supplier last year.

Meanwhile, India's crude imports from Middle Eastern suppliers tumbled 21% to 2.144 million b/d in 2023, while Russia contributed over 35% of India's total crude imports last year, at 1.7 million b/d, according to S&P Global data.

Implications for North Asia

Refiners in South Korea and Japan indicated that US is a crucial supplier outside of the OPEC and the Middle East circle as the North American producer is capable of providing several VLCCs of light sweet and medium sour crude every trading cycle.

In addition, US crude's price link to Platts Dated Brent complex often acts as a hedge against any volatility and unforeseen spikes in Platts Dubai market structure, Persian Gulf sour crude prices and Middle Eastern official selling prices.

"US provides that cushion because it is the rare non-OPEC producer capable of supplying as much as 20 million barrels per month for us," a feedstock manager at a South Korean refiner said.

"Although US crude cargoes are often traded on Dubai benchmark basis for some Asian customers' convenience, the primary pricing mechanism for US grades are linked to the Brent complex. This also provides cushion against any price shocks in the Dubai market structure," he added.

South Korea, Asia's biggest US crude buyer, purchased 142.38 million barrels in 2023, up 4.4% from 2022, latest data from Korea National Oil Corp. showed.

It would be prudent to avoid depending too much on Middle Eastern suppliers and it's healthy to at least maintain the Middle East vs non-Middle East supply ratio at 75% to 25%, a senior market analyst at Korea Petroleum Association said.

But Japan's refining industry is considered extremely conservative in terms of feedstock selection and crude slate as the country relies heavily on Middle Eastern suppliers. It imported 2.42 million b/d of sour crude from the Persian Gulf suppliers in 2023, making up 95.1% of the nation's total refinery feedstock purchases, latest data from the Ministry of Economy, Trade and Industry showed.

Shunichi Kito, president of the Petroleum Association of Japan, warned earlier in the year that Japanese refiners need to prepare contingency arrangements for any potential disruption to Middle East oil supplies.

Japan's imports of 53,472 b/d of low sulfur crude from the US in 2023 were almost double of 27,451 b/d received in 2022, METI data showed.

"The sharp increase in the US crude imports is perhaps a step in the right direction for diversification efforts," the trading source said.