Asian refiners diversify away from Middle Eastern oil

Asian refiners are reducing their intake of Middle Eastern oil in favor of crude from the United States and Brazil.

The move comes amid shrinking margins and rising Saudi oil prices—even as international benchmarks remain largely range-bound, according to OilPrice.com.

Yet the diversification is, for the time being, quite moderate, with Saudi Arabia still the top supplier to Asia as a whole, far ahead of both the United States and Brazil. Whether this would turn into a trend is uncertain because there are all those barrels of relatively cheap Russian crude, too.

Reuters’s Clyde Russell reported this week that Asian imports of crude from Saudi Arabia fell to 4.88 million barrels daily last month, which was down from 5.07 million barrels daily in March, per LSEG data. The April average of Saudi imports was even more markedly lower than the February daily, which stood at 5.52 million barrels.

The decline came on the back of repeated Saudi oil price hikes, which, together with weaker demand for fuels, led to slimmer refining margins for Asian oil processors. Naturally, that made refiners turn to bargain hunting.

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Saudi Arabia raised its official selling prices for oil in all three months since March. The latest hike saw the price of its flagship Arab Light rise to a premium of $2.90 over the Oman/Dubai benchmark. This is already quite a bit more expensive than West Texas Intermediate, at over $83 per barrel versus $79 per barrel for WTI. So WTI-linked crudes from the U.S. begin to look more affordable, and so does Brazilian crude, which is also commonly priced against the U.S. benchmark.

Oil from the Americas is not Asian refiners’ top choice because of the longer journeys that add to the cost, potentially wiping out any price discount in the oil itself and making the switch largely pointless. Yet the data about rising Asian imports of both U.S. and Brazilian crude suggests that the switch might make sense for some refiners given the current conditions.

The diversification may yet gather pace as the market widely expects OPEC+ to stick to its production cut policy at its next meeting on June 1. This means that even if Saudi Arabia arrests the trend of hiking prices, it is unlikely to cut them, leaving its crude expensive compared to alternatives, including from its OPEC+ partner Russia, which is already China’s biggest oil supplier—and India’s, too.

Reuters’ Russell expects Asian refiners to continue buying more U.S. and Brazilian oil until the Saudis cut their prices. Yet he notes that their available capacity for processing lighter, sweeter U.S. crudes would limit this potential increase in purchases. Most refining capacity in Asia is calibrated to work with medium and heavy crude, which refiners buy from the Middle East and Russia.

There is also the question of demand, which would shape refining margins in the coming months. There has been concern about demand strength in Asia as a whole— and China specifically—after its crude oil intake declined from the previous month.

Asian oil imports dipped by 440,000 bpd in April from March, according to LSEG data cited by Reuters’ Russell in early May. The four-month daily average was higher, by 300,000 bpd, which the report suggested was disappointing—especially for OPEC, which had predicted more robust demand growth.

Growth may yet pick up, especially in China, where Rystad Energy expects a pickup later in the year with a new refinery starting up and higher fuel export quotas motivating more production. Where the crude for filling those quotas will come from, however, is the more interesting question. It seems that less of it may come from the Middle East and more from Brazil and the U.S., at least for the time being.