Asian refiners mull more spot crude purchases over term as Brent-Dubai spread tumbles

Many Asian refiners are considering tweaking their crude procurement strategies to accommodate more spot purchases than term supplies if the Brent-Dubai price spread remains low, amid a slew of US sanctions threatening to restrict the free trading of various heavy crude grades globally.

The Brent-Dubai price spread is likely to remain under pressure over the next several trading cycles due to tougher sanctions on buyers of Iranian and Venezuelan crude, which may lead several Chinese and Indian refiners to source more Middle Eastern crude. Some US end-users might also increase their intake of Persian Gulf sour crude if cracking margins for heavy sour Canadian and Mexican crude falter due to higher tariffs, according to traders and refinery sources in Singapore, Hong Kong, Seoul, Bangkok, Beijing, and Tokyo.

Typically, the spread should be at a premium of around $1.5/b or more, given the significant quality difference between light sweet Brent and medium sour Dubai. However, if the spread hovers around parity or consolidates in negative territory, it may be advisable to reduce staple term Middle Eastern contractual volumes and make room for more spot-based purchases, particularly WTI Midland, West African, and Southeast Asian sweet grades priced against Brent, according to feedstock managers and linear programming model analysts at five Japanese, South Korean, and Thai refiners.

"Japan relies too heavily on Middle Eastern supplies, and the sharp decline in the Brent-Dubai price spread does not bode well for the overall refining margin... it might be prudent to rework the feedstock strategy in favor of higher spot crude intake from North America and elsewhere," a feedstock and logistics manager at ENEOS said.

The Brent/Dubai Exchange of Futures for Swaps (EFS) spread -- a key indicator of Brent's premium/discount to the Middle Eastern benchmark -- has been trending sharply lower, falling to minus 18 cents/b on March 20, the lowest level since minus 19 cents/b on Aug. 24, 2023, according to Platts, part of S&P Global Commodity Insights. The spread averaged 30 cents/b in March, down from February's 63.3 cents/b and January's $1.50/b.

A weaker EFS makes various light and sweet crudes from the Americas, North Sea, Mediterranean, and Africa -- linked to the European benchmark -- more economical compared to Dubai-linked Middle Eastern grades.

In Thailand, senior feedstock managers at state-run PTT emphasized the importance of maintaining a balance between term and spot crude procurement. However, greater emphasis on spot trading may be necessary to optimize margins during volatile market conditions.

In the first two months of 2025, Thailand imported 131,949 b/d of US crude, a 21% increase from the same period last year. However, imports from Saudi Arabia dropped 24% year over year to 111,042 b/d, according to the latest Thai customs data. US crude is actively traded in international spot markets, while Saudi crude is sold strictly on a term contract basis with destination restrictions.

North Asian refiners

Although OPEC+ plans to gradually roll back 2.2 million b/d of production cuts from April could add more Middle Eastern sour supplies, stronger demand from Indian refiners for Persian Gulf cargoes may continue to support the Dubai complex, keeping the Brent-Dubai spread under pressure, according to refinery feedstock managers in South Korea and Thailand, as well as traders in Singapore and Hong Kong.

To navigate the low Brent-Dubai price spread, feedstock managers at two major South Korean refiners indicated that multiple VLCCs of WTI Midland crude would be consistently purchased in the spot market every trading cycle, while exploring opportunities in West African, Mediterranean, Southeast Asian, and South American markets.

As of March 26, approximately 5-6 million barrels of CPC Blend crude have been fixed for April loading to Asia, primarily destined for South Korea and China, according to two Singapore-based traders familiar with Mediterranean crude flows.

Several Japanese refiners, including ENEOS, reiterated that Japan's dependence on Persian Gulf supplies for over 95% of total crude procurement is excessively high, necessitating more supply diversification efforts. Taiyo Oil noted that around half of its crude slate consists of Middle Eastern sour grades, while the other half comes from Southeast Asia and other regions.

While adjusting the crude slate is complex, increasing the intake of spot Southeast Asian sweet crudes is feasible to maximize margins and middle distillate production yield, a trading management source at the Japanese refiner said.

A Singapore-based Japanese integrated trading company noted that US tariffs could hinder Canadian crude sales to the US, presenting opportunities for Japanese refiners. Japan imported 17,728 b/d of Canadian Cold Lake crude in February, compared to zero shipments from Canada a year earlier, according to the Ministry of Economy, Trade and Industry.

In China, at least two or three independent refineries have paused purchasing Iranian cargoes and are now looking at West African spot cargoes and Far East Russia's ESPO crude, according to sources in Shandong. Djeno crude from Congo is offered at around premiums of $4.2/b-$4.5/b against the ICE Brent Futures on a DES Shandong basis, while medium sweet ESPO crude cargoes are available at more attractive prices, according to Shandong-based trade sources.