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Petrotahlil - The region’s crude grade have seen significant demand from Chinese buyers as economic activity picks up in Asia

Chinese demand has been particularly strong for Middle East sour crude grades. AP

 

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 b/d this year, leaving the global Dated Brent oil price in the upper $30s to lower $40s/b range.

However, crude grades are not homogenous and there are hundreds of different types, each with their own qualities and characteristics.

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

The international market has settled on using certain benchmarks, against which the value of crudes is measured.

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.

Platts Dubai rose to a 1 cent/b premium to Cash Brent at the Singapore market close on November 9. This means 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/b discount to Cash Brent at the Singapore close.

The market has seen a combination of strong interest from Asian refiners to purchase crude – buoyed by a resurgence in the region’s major economies, especially India and China – and production cuts from the Opec + 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.

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

Opec and its members have complied to their production cuts in recent months, with some countries even cutting back extra barrels as they have to compensate for previous over production.

The most recent Platts Opec+ survey for October shows that the group’s 10 non-Opec alliance members produced 34.40 million bpd in October, reflecting 100.2 per cent compliance with their quotas.

Meanwhile, Western benchmarks – Brent and WTI – remain under pressure from poor refining margins, linked to weak refined product demand due to ongoing lockdowns and reduced movement across the Western Hemisphere.

In Europe, a second round of lockdowns following a rise in the number of coronavirus cases across much of the continent in October and November sent further shockwaves through crude markets. However, the consequences on fundamentals have been notably different from those seen earlier this year.

This is mainly because of a rise in demand from Chinese and Indian refiners, who see a mix of West African and Mediterranean sweet crudes 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 back foot.

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.

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