Red Sea crisis prompts Asia to rethink oil policy, but near-term supplies intact

Asia may not witness dramatic changes to near-term oil supplies amid the ongoing Red Sea crisis, but refiners are chalking out alternative plans to ensure steady feedstock flows in the event of an escalation -- a move that could inflate insurance costs and crimp refining margins, sources said.

Although the region relies on imported oil for bulk of its needs, the strategic push among Asia's top importers to massively diversify their import baskets over the years, as well as expanding strategic storage, will come in handy to ensure smooth and uninterrupted flow of feedstocks.

According to Zhuwei Wang, Asian oil analytics manager at S&P Global Commodity Insights, the Red Sea crisis has three aspects to it, as far as Asian oil flows are concerned.

"First, any escalation will create hurdles for Russian crude flowing to Asia, forcing buyers to look for substitutes from other origins," he said.

"Secondly, for products moving north-bound from Asia to Europe, exporters are cautiously watching developments before taking the plunge. Add lastly, longer routes have the potential to create incremental bunker demand in Asia."

More shippers are avoiding the Red Sea and Bab al-Mandab Strait after a US-led coalition struck Iran-backed Houthi militants in northern Yemen, raising fears of further escalation which would impact key seaborne trade routes.

Crude flows to India, China

Chinese shipping and trade sources said oil flows into China have not been impacted much by the Red Sea turbulence, as few cargoes were heading to China on that route.

"Red Sea tensions are having a limited impact on China's crude oil imports. The bulk of China's Red Sea crude imports come from Russia, and Russian ships and cargoes not being prime targets of the attacks at this stage. Other crudes taking the Red Sea route, like those from Northwest Europe and the Mediterranean, play a minor role in China's overall import portfolio," said Yao Mengbi, a senior analyst with S&P Global's downstream research and analysis.

On the export front, "China's refined oil primarily heads to the Asia-Pacific region, which implies that Red Sea tensions are having limited impact," Mengbi added.

The impact on Russian oil flows to India has also been minimal, with no major diversions seen so far.

Russia contributed over 35% of India's total crude imports in 2023, amounting to 1.7 million b/d, according to S&P Global data.

Trade sources and analysts said that although a series of attacks on shipping in the Red Sea compelled traders and suppliers to explore alternative routes via the Cape of Good Hope, crude shipments from Russia to India have remain unaffected so far.

According to S&P Global, Red Sea tensions are likely to support Asia bunkering demand in Q1. The re-routing of vessels through the Cape of Good Hope could extend the cumulative voyage length and cargo delivery time by a few weeks, as well as lead to higher fuel requirements and overall costs.

Worries about margins, not supplies

Asia is not necessarily concerned about Middle Eastern sour crude supplies for 2024, as major sellers, including Saudi Aramco and Abu Dhabi National Oil Co., fully respect Asian customers' demand regardless of their production cut commitments, according to feedstock managers at Japanese, South Korean, Taiwanese and Thai refiners.

However, economics for cracking Middle Eastern sour crude have been deteriorating as delivery costs for bringing in Persian Gulf barrels to the Far East have been rising with shippers demanding risk premiums, while tanker insurance costs are also trending higher, the feedstock managers added.

On a dollar per metric ton basis, Platts assessed the benchmark Persian Gulf-Far East Asia 130,000-mt Suezmax rate at an average $33.11/mt to-date in January, on course to set the highest monthly average since $34.49/mt in April 2023, S&P Global data showed.

"In 2024, OPEC+ cuts pose little threat to us because we are very certain that Aramco and ADNOC would continue to respect Asian demand as they always have been doing so, but logistics costs are a worry as the geopolitical tensions are raising the delivery fees and ultimately hurting Asia's refining margins," said a feedstock and refinery operation manager at Japan's ENEOS.

Plan B in place

Asian refiners may even look at cutting back Middle Eastern term contractual volumes and explore other options like African, US and South American crude to maximize margins, some feedstock managers added.

US crude, for one, is increasingly becoming more attractive for Asian refiners as the price of lighter and sweeter WTI crude is nearly at par with high sulfur Persian Gulf grades on a delivered basis, Asian traders and feedstock managers said.

The outright price spread between WTI MEH (Magellan East Houston), on a CFR Asia basis, and the Middle Eastern benchmark Dubai crude, on an Asia delivered basis, averaged 31.4 cents/b in the second half 2023, compared to $1.11/b in H1 2023 and $3.83/b in H2 2022, S&P Global data showed.

"When much higher quality US crude can be bought at a similar cost to Middle Eastern high sulfur grades, it's something that the trading team and linear programming model analysts would have to seriously discuss about," said a trading source at Cosmo Oil.