Saudi Arabian oil cuts not alarming for Asia amid modest demand outlook, supply options

Asia's oil supply is unlikely to tighten following Saudi Arabia's output cuts, as moderate demand growth due to economic turbulence and healthy production outlook outside the OPEC bloc are expected to keep availability concerns at bay for now, trade sources and analysts told S&P Global Commodity Insights June 5.

While none of the bigger Asian oil customers of the Middle East are expecting an immediate reduction in allocations, what could be worrisome for some buyers, such as South Korea and Japan, is a rise in prices, as they stay clear of Russian oil. For China and India, however, supplies from the biggest non-OPEC supplier would continue to provide a cushion.

"The oil market faces headwinds from an uneven reopening of China's economy, US banking problems, high interest rates, and strong oil production growth outside of OPEC+ including from the United States, Canada, Brazil, Norway and Guyana. In terms of world oil demand and supply fundamentals, the cut will likely expand a previously expected supply deficit in the third quarter of this year," said Jim Burkhard, vice president and head of research for oil markets, energy and mobility, at S&P Global Commodity Insights.

Saudi Arabia said over the weekend that it will slash its crude output by an extra 1 million b/d for at least July on top of its existing production cuts, under the kingdom's latest bid to reverse a tide of bearish trade sentiment and tighten the oil market.

Crude oil futures rose in midmorning Asian trading June 5 after the announcement. At 10:35 am Singapore time (0235 GMT), the August ICE Brent crude oil futures contract was up 80 cents/b, or 1.05%, from the previous close at $76.93/b, while the NYMEX July light sweet crude contract rose 83 cents/b, or 1.16%, to $72.57/b.

With other OPEC+ members agreeing to maintain their current supply curbs through the end of 2024, the alliance's total quota cuts have deepened to 4.7 million b/d for July -- some 5% of global capacity -- although many members have failed to hit their targets for years, making the actual physical reductions far lower.

US crude, Asia's July term supply

"The production cuts as of course a concern from the price point of view but inflows from other suppliers have been growing. US crude sales to Asia have also remained healthy in the early part of the year. That will ease some of the supply concerns for the region," said a regional oil trading source.

US crude oil exports rose 1.5 million b/d year on year to a monthly record high of 4.8 million b/d in March. Asia accounted for 43.6% of US crude exports in March, down from 44.5% in February, but up from 43% a year earlier. China was the top destination for US crudes in March, with an average of 1.0 million b/d, S&P Global data showed.

In South Korea, two major refiners said they do not expect any term crude allocation cuts or adjustments for Saudi Arabian barrels in July as Saudi Aramco typically prioritize its top Asian customers.

"So far, we have not been notified of any changes to our July term Saudi crude liftings," said a feedstock manager at a major South Korean refiner. "Chinese and Indian refiners are buying much less from Saudi Arabia these days so Saudi Aramco's 1 million b/d extra output cut for July wouldn't necessarily alter the actual term supplies to other major buyers, at least across East Asia."

Crude traders at a Japanese refiner and a Chinese trading firm also told S&P Global that Aramco is unlikely to reduce to alter July term contractual volumes.

Saudi crude official selling prices appear rather expensive, while uncertainty over consumer oil demand, refining margins and economic growth have recently been encouraging some Asian buyers to nominate minimum term allocation anyway, according to trading sources at Chinese, Japanese and South Korean refiners.

Even Thailand's term Saudi Arabian crude intake for July and beyond is expected to remain stable as Aramco has strong supply commitments to Asian customers, said a feedstock management source at a state-run Thai refiner said.

"I think big part of Saudi Arabia's extra 1 million b/d cut for July simply reflects its weaker sales to India and China in recent months. The additional output cut doesn't mean Aramco will supply less to many other important Asian customers," the Thai refinery feedstock management source said.

Russia factor

For India and China, growing Russia crude sales are expected to dilute the impact of the latest production cuts.

"The recent cuts in production to prevent prices from falling down can again put a burden on oil importing countries. However, it will have little impact on India as the share of Russian oil in India's total imports have now gone up to 42% as per the recent reports," said Vibhuti Garg, director for South Asia at the Institute for Energy Economics and Financial Analysis.

According to S&P Global, initial data suggests that Russian crude imports by Indian refiners in May reached an all-time high of nearly 2.0 million b/d, surpassing purchases by Iraq and Saudi Arabia combined and replacing Middle Eastern, African and some US supplies.

Looking ahead in 2023, the prospects for Russian crude oil flows into India look promising. It is projected that these imports may account for about 40% to 45%, or around 2 million-2.5 million b/d -- in India's crude oil import basket, assuming that prices remain competitive compared with alternative sources, S&P Global said.

"If India proceeds with its plans to import crude oil for the purpose of filling its strategic petroleum reserve, it could potentially lead to an increase in Russian imports, especially if they consider incorporating Russian barrels into their reserves," said Sumit Ritolia, senior South Asia oil analyst at S&P Global.

In China, Russian crude import volumes over January-April 2023 were up 27% year on year at 1.98 million b/d.

China's crude imports from Russia are likely to grow for the foreseeable future as Russia increased ESPO supplies to 39 Aframax-sized cargoes in May, with China taking 29 and India 10, according to shipping data from Kpler and Platts cFlow, ship and commodity tracking software from S&P Global.