Middle East oil exports to Asia seen weakening amid OPEC+ cuts, cheap Russian barrels

Middle East oil exporters are expected to continue to lose market share in some Asian countries, particularly in price-sensitive India, amid the 1.66 million b/d voluntary cuts by OPEC+, cheap Russian barrels and higher priced Dubai-linked cargoes.

Although exports from seven major oil producers in the Middle East rose 0.6% year on year to 17 million b/d in the first quarter, these countries' exports to India plunged 25% to 2.338 million b/d over the same period, according to tanker-tracking data from S&P Global Commodities at Sea. The seven producers are Iraq and the six Gulf countries: Kuwait, UAE, Oman, Saudi Arabia, Qatar and Bahrain.

Russia in Q1 unseated Iraq as No. 1 oil supplier to India, the world's third-biggest crude consumer, which meets around 85% of local demand via overseas purchases.

"Both OPEC cuts and lower Middle East exports later this year due to refinery ramp-ups/new commissioning will incentivize Indian refiners to increase intake of Russian crudes," said Ahmed Mehdi, analyst at Renaissance Energy Advisors and a fellow at Oxford Institute for Energy Studies.

On April 2, Saudi Arabia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria, Oman and Gabon announced they would start voluntary oil production cuts from May to the end of the year, taking the total to 1.66 million b/d. This is on top of the 2 million b/d collective cuts that all OPEC+ members started in November.

The gap between the price of global benchmarks and Russian crudes such as Urals has widened since the invasion of Ukraine in February 2022. Prior to the war, the difference between Urals and Dated Brent was about $10/b.

Platts, part of S&P Global Commodity Insights, assessed Urals at $53.20/b April 5, while Dated Brent was $85.595/b.

Eyes on Southeast Asia

India began opportunistic buying of Russian crude in 2022, when Moscow's share from total imports was 2% in January. In Q1 2023, Russia's share surpassed 30%.

India was the key driver of Asia's oil demand growth in 2022 and will contribute to about 17% of regional growth in 2023, with demand in the country recovering faster than the rest of the region, according to estimates by S&P Global.

With a lower market share in India, Middle East producers are turning their eyes toward increasing exports to other countries in Asia, such as Malaysia, Indonesia and the Philippines.

The seven Middle East oil producers' exports to Malaysia soared 73% year on year to 491,000 b/d in Q1, while flows to Indonesia rose more than 45% to 150,000 b/d, according to S&P Global data.

"Russia has been the biggest supplier of oil to India and inflows of Russian crudes will likely continue due to attractive prices, with less imports of Middle Eastern crudes," said Lim Jit Yang, adviser for Asia-Pacific oil markets at S&P Global. "But some Asian countries are taking more Middle Eastern crudes."

For example, Japan's reliance on Middle Eastern crude is at an all-time high, with imports from the region making up 98.1% of the country's imports in February, according to official data.

Europe can't replace China

Besides sending cargoes to certain Asian countries, Middle East oil exporters are also boosting exports to Europe, which is keen to replace Russian barrels due to the EU's ban on crude and oil product imports from Moscow.

The Netherlands was the top European oil importer from the seven Middle East producers in Q1, with exports rising by more than 50% year on year to 233,500 b/d, followed by Greece and France, S&P Global data showed.

"Middle East exporters have some level of protection from term contracts in Asia," said Mehdi. "The reality is that a new feature of the market has been the rising cost of re-optimizing flows [to Europe]."

However, exports to Europe pale in comparison to China, which received 4.805 million b/d or about a third of the 17 million b/d exports sent by the seven Middle East producers in Q1, S&P Global data showed.

"In the long term, Europe is not a reliable customer for Middle East and North African oil," said Karen Young, senior research fellow at Columbia University's Center on Global Energy Policy. "But we also don't expect Russian oil to find a home in Europe in most future scenarios. So, as long as there is demand [in Europe]), it may well come, at least partly, from MENA."

Middle East oil producers, some of which base their official selling prices on Dubai assessments, are at a disadvantage in Asia after the narrowing of the front-month Brent-Dubai Exchange of Futures for Swap, which recently touched its lowest value since February 2021 and encouraged Brent-linked exposure from Asian refineries.

The Brent-Dubai EFS spread, which stood at $2.10/b April 5, reached a 2022 high of $14.83/b on May 31, S&P Global data showed.

"If Dubai-linked crudes are more expensive, China and India will buy more Russian crudes," Mehdi said.