APPEC: Tight oil supplies, Asia's uneven demand recovery in spotlight as summit starts

The spotlight will be on Asia's patchy oil demand revival, tightening supply fundamentals, energy security concerns, and the possibility of a global recession when delegates arrive at the Asia-Pacific Petroleum Conference, or APPEC.

The three-day conference, set to take place over Sept. 4-6 and organized by S&P Global Commodity Insights, will also delve deeper on how Asian energy companies and policy makers are crafting their future energy roadmap by striking a balance between fossil fuels and newer forms of energy.

"On the oil side, geopolitical conflicts, uneven demand recovery, price volatility will be in focus at APPEC. In addition, the evolving refining business, upstream investment, as well as the impact of Russia, the Middle East and G7 on global oil flows will be key topics of discussion," said Kang Wu, global head of demand research at S&P Global.

While the recent indicators of the US economy reflect a stronger-than-expected performance, China's recovery falling below the expectations of analysts and policy makers is likely to keep the oil market on tenterhooks in the foreseeable future.

"The macro narrative remains largely unchanged with the US economy performing better than expected and China recovery falling below expectation," S&P Global said in a recent research note.

On an annual basis, Asia's total oil demand is expected to increase 3.8%, or 1.39 million b/d, on the year in 2023 to 38.1 million b/d, according to S&P Global.

And on the price and supply fronts, the recent move by OPEC+ and its allies have been supportive for the oil market, with Saudi Arabia extending its 1 million b/d cut to September and Russia agreeing to cut 300,000 b/d.

Market fundamentals, trade flows

S&P Global expects global oil stock draws to average 2 million b/d from mid-June through September. Stock draws are anticipated to moderate in Q4 and to turn into builds in early 2024. Following this fundamental trend, S&P Global expects Platts Dated Brent to average $83/b in Q3 2023 and then moderate to $81/b in Q4 2023 and to $74/b in Q1 2024. Looking at the entire year, Platts Dated Brent is expected to average $81/b in 2023 and $77/b in 2024.

"For commodity investors, although China remains key and the one we are watching closely, the recent uptick in oil prices is a testament that fundamentals eventually matter," S&P Global said.

On an annual basis, S&P Global expects total oil demand in China to rise 6.1%, or 940,000 b/d, on the year in 2023 to 16.4 million b/d, and up 3.5% in 2024.

Asia's oil flow map has dramatically changed since the start of the Russia-Ukraine war.

For instance, Russia is now number one crude supplier to India. APPEC participants will be looking for signs on whether the volumes have reached their peak or could go higher. And more importantly, they will seek insight on whether oil flows would revert to pre-Ukraine war patterns once the conflict ends.

India received 1.82 million b/d of crude oil from Russia, accounting for approximately 37.2% of India's total crude oil imports from January to August. This is a significant increase from the same period last year when India imported only around 0.47 million b/d of crude oil from Russia, constituting roughly 10.2% of its total imports.

According to S&P Global, India's oil demand is predicted to grow by 242,000 b/d in 2023, a slight downward revision of 4,000 b/d from the previous update. The majority of this growth, over 60%, will likely be due to middle distillates.

Refining outlook

Refining operations are gathering momentum in Asia. For instance, in India, as the festival season in September and October approaches, crude runs expected to be around 5.3 million-5.4 million b/d, primarily due to strong domestic demand and favorable profit margins.

Asian refiners are confident that they would continue to secure adequate term Middle Eastern sour crude supplies despite OPEC and its alliance maintaining their firm stance to control and limit the group's production levels.

"Top Middle Eastern suppliers like Saudi Arabia are not exactly cutting supplies to their key Asian customers as they highly value big Asian buyers and are worried about cheap Russian barrels eating into their market share in Asia," said a feedstock trading manager at a major South Korea refiner.

However, rising benchmark outright prices, a recent uptick in Middle Eastern official selling prices and higher price differentials in the Persian Gulf spot market on the back of the tight OPEC+ supplies are causes of concern for Asia, traders and refinery sources said.

"Rising oil prices were a key feature across the latest survey, with firms across both manufacturing and services reporting an impact on input costs," said Andrew Harker, economics director at S&P Global Market Intelligence.

Japanese refiners and traders are also concerned about rising outright prices and higher spot physical market price differentials, as a weak yen sharply increases the country's overall manufacturing input cost burden.

And on the long-term refining theme, APPEC delegates will also look to focus on how refiners in Asia are fast carving out their diversification plans.

While renewables, hydrogen and solar also figure in their ambitions, a key area of focus for refiners is raising their petrochemical intensity to ensure that their business models remain profitable in the event electric vehicles and other cleaner forms of energy take a toll on demand for transport fuels. Therefore, for many refiners, going further downstream is a viable option for remaining relevant in the longer term.