OPEC+ move dispels Asia's crude supply concerns amid reviving demand

Asia is breathing a sigh of relief amid growing expectations that the move by the OPEC-led alliance to boost supplies as well as sustained releases from the US strategic reserves will finally help to clear the uncertainty over cargo availability and rectify the mismatch between global demand and supply.

With China's demand recovering after lockdowns and the rest of Asia pushing to reopen their economies, analysts said the incremental supplies should provide breathing space to refiners at a time when they are scouting for clarity on how the EU insurance ban on Russian cargoes might affect cargo flows.

According to Platts Analytics, the decision by OPEC+ to raise quotas by 648,000 b/d for July and another 648,000 b/d for August -- about 50% higher than the recent monthly increases -- will be music to the ears of global refiners as they head into the summer driving season in the northern hemisphere.

"Specifically for Asia, refiners will be looking to import more crudes as demand is expected to rise by 2 million b/d in the third quarter compared with the second quarter," said Lim Jit Yang, advisor for Asia-Pacific oil markets at Platts Analytics.

"US SPR releases are also helping to ease the oil supply and demand balances, adding about 0.8 million-1 million b/d of supply in recent weeks," he added.

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Higher intake in Q3

Major Asian crude importing nations including India, South Korea, Japan and Thailand have indicated that OPEC+ producers are still raising output at a slower-than-desired rate. The increase would nevertheless prompt Asian refiners to sharply raise their term Middle Eastern crude intake as they continue to maximize operating rates to fully capture lucrative middle distillate cracks, especially for diesel and jet fuel.

However, major Asian refiners and crude importers -- including Thailand's PTT, Japan's ENEOS, Taiwan's CPC Corp. and South Korea's SK Innovation -- are wary of the possibility that a significant portion of the incremental Middle Eastern supply may go to end-users in Europe, leaving Asian customers in the back end of the buying queue, feedstock management sources at Asian refiners said.

"Asian buyers would still be entitled to receive more barrels I am sure, but how much of the OPEC production increase would be available for Asian refiners would be the key issue in the Far East," said a linear programming model and refining margin strategist at a South Korean refiner.

Still, as Chinese end-users and some Indian refiners are widely expected to continue absorbing Russian crude, refiners in Taiwan, South Korea, Japan and Thailand would be able to take a decent share of the incremental OPEC supply, especially from Saudi Arabia and the UAE, over the coming trading cycles, according to traders based in Singapore, Bangkok and Seoul.

"I would fully understand if a big chunk of incremental Middle Eastern supply goes to Europe, but Asian refiners would still be able to request and acquire increased third quarter term supply, especially from Saudi Arabia and the UAE, the two producers that hold ample spare output capacity," said a trading desk manager at a Japanese refiner.

Refiners prepare for demand revival

It's crucial for Asia-wide refiners to secure adequate amount of crude and other refinery feedstocks as they look to maintain high run rates and maximize middle distillate production amid a rapid recovery in transportation fuel demand on the back of easing pandemic-related restrictions and air passenger traffic, oil product marketing sources at PTT and ENEOS said.

In addition, a severe shortage of middle distillates, especially diesel, is putting a lot of constraints on everyday consumers and businesses across the region with retail auto fuel prices surging to record highs.

Major Asian refiners indicated that they had already submitted their request for an increase in Q3 term crude allocations from Saudi Aramco and ADNOC.

"The pace and scale of the OPEC production hike is not quite satisfactory from the Asian buyers' point of view, but Middle Eastern producers are at least supplying much more than what they offered one-to-two years ago. We should see imports of Saudi crude grind higher to pre-pandemic levels eventually," a market analyst at ENEOS said.

Taiwan imported 264,000 b/d of crude from Saudi Arabia over January-April, up 20.2% from the same period a year earlier, according to latest data from the country's Ministry of Economic Affairs. Japan imported 1.13 million b/d from Saudi Arabia in the first four months, up 4.6% from a year earlier, latest data from the Ministry of Economy, Trade and Industry showed.

South Korea received 953,000 b/d of Saudi crude during the same period, up 29.8% from a year earlier, latest data from state-run Korea National Oil Corp. showed. The world's fourth biggest crude importer could see Saudi crude imports reach near 1 million b/d by Q4, though a lot would depend on the refiners' term supply contract negotiation and OPEC+ production strategy, according to analysts at the Korea Petroleum Association.