Middle East’s crude oil attracts Asian refiners like never before

Oil buyers in Asia are increasingly turning to heavy sour crude oil grades from the Middle East, which as a result, have seen their value increase relative to light sweet crudes.

Energy markets have witnessed unique demand destruction in 2020 due to the coronavirus pandemic, with S&P Global Platts Analytics forecasting that consumption will drop by 8.5 million bpd (barrel per day) this year, leaving the global Dated Brent oil price in the upper $30 to lower $40 range.

Crude grades, however, are not homogeneous and there are hundreds of different types, each with their own characteristics and qualities.

The value of a grade of crude oil is usually determined by the underlying value of the products that are made when they are refined. In the analysis of the competitiveness of competing crudes in major consumer markets such as Asia, the refinery yields of different crude grades and underlying refinery economics are critical.

The international market has agreed to use certain benchmarks against which the crude value is calculated.

Values for Platts Dubai, the Middle East sour crude benchmark assessment, have been supported in recent weeks by the ongoing tightness in the sour crude complex.

At the Singapore market closing on November 9, Platts Dubai increased a 1 cent per brent premium to Cash Brent. This suggests that the market is valuing sour Middle Eastern crude above North Sea sweet crude, which the Brent benchmark reflects. By contrast, in 2019 Platts Dubai was assessed at a 74 cents per barrel discount to Cash Brent at the Singapore close.

Increased demand

The market has seen a combination of strong interest in buying crude from Asian refiners, boosted by a resurgence in the major economies of the region, especially India and China, and production cuts from the OPEC (Organization of the Petroleum Exporting Countries) group.

Chinese demand has been particularly strong for Middle East sour crude grades, with barrels of Abu Dhabi’s Upper Zakum, Qatar’s Al Shaheen and Oman’s crude export blend – all deliverable crudes into the Platts Dubai benchmark – recently purchased by the world’s largest importer of crude oil. By way of example, China’s independent Rongsheng refinery is set to expand its refinery capacity and it has been seen buying crude cargoes ahead of its expansion.

Furthermore, demand for Middle East crude from Indian refiners has picked up against a backdrop of improving domestic gasoline margins.

In recent months, OPEC and its members have complied with their production cuts, with some countries even reducing additional barrels as they have to compensate for previous overproduction.

Efforts from OPEC

The most recent October Platts OPEC+ survey shows that 34.40 million bpd was generated by the group’s 10 non-OPEC alliance members in October, representing 100.2 percent compliance with their quotas.

Meanwhile, because of ongoing lockdowns and reduced movement across the Western Hemisphere, Western benchmarks such as Brent and WTI remain under pressure from low refining margins, linked to weak refined product demand.

In Europe, after an increase in the number of coronavirus cases across much of the continent in October and November, a second round of lockdowns sent more shockwaves across crude markets. The impact on fundamentals, however, have been substantially different from those seen earlier this year.

This is mainly due to increasing demand from Chinese and Indian refiners, who see a combination of sweet crudes from West Africa and the Mediterranean as more economically viable options.

While values for the Platts Dated Brent benchmark have found some support following positive reports on coronavirus vaccine trials, prices remain fundamentally weak as oil product demand remains stuck on the lower end.

Oil markets are still vulnerable and on a net basis, Platts Analytics sees oil demand in 2021 being lower than that of 2019. However, there will be winners and losers, and the premium of Platts Dubai to other major oil benchmarks highlights the extent that heavier, sourer grades of crude from the Middle East are in strong demand from buyers in Asia in a two-tier recovery.