Asia’s pivot to US crude

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With Iranian barrels out of bounds and repeated attacks endangering Middle Eastern oil supply chains, Asian buyers have dialed up their efforts to diversify supply this year. Gawoon Philip Vahn reports

Asia has demonstrated a voracious appetite for US crude oil in 2019.

Major energy consumers including India, South Korea and Japan, as well as multiple Southeast Asian buyers, are increasingly shifting their focus to North American barrels to cover growing supply disruption risks in the Middle East.

Asian refiners have been under constant pressure this year to secure adequate crude supply as geopolitical tensions in the Middle East significantly raised the region’s energy security concerns.

The US sanctions blocking access to abundant Iranian crude supply, as well as a series of attacks on oil tankers and key output facilities in the Persian Gulf, meant many regional refiners that rely heavily on Middle Eastern sour crude grades were kept on their toes.

South Korea, China, Japan and India were among the eight countries granted a waiver in November 2018 allowing imports of Iranian barrels to continue until May 2, 2019. But with no further extensions beyond that date from the White House, the vast majority of Asian refiners suspended purchases of Iranian crude and condensate.

Shortly afterwards, a series of attacks in June on oil tankers in the Gulf of Oman, including one on a UAE- flagged ship, put the oil market on alert and triggered growing concerns over supply disruptions.

Iran denied involvement in the incidents. However, the country had on a number of occasions threatened to close the narrow Strait of Hormuz if its oil exports were squeezed by US sanctions, which are supported by its regional rivals Saudi Arabia and the UAE. About 21 million barrels of crude transit the waterway daily – more than one fifth of global oil supply.

Then in September, Saudi Arabia – the biggest supplier of crude to Asia – suffered a temporary loss of 5.7 million b/d of crude production after attacks on its core oil facilities. Following the attacks, which briefly curtailed nearly 60% of the kingdom’s output, a number of Asian refiners were notified by Saudi Aramco that some of their September and October term crude oil supplies would be affected.

In China, at least three state-run refineries saw shipment of their October term contract barrels from Saudi Arabia pushed back due to the output disruption. Several other term customers were notified by Saudi Aramco that they would have to take Arab Medium or Arab Heavy as substitutes instead of light sour crude.

Reliable supply

The heightened risk of Middle Eastern supply disruptions gave Asian refiners little choice but to seek out more reliable crude supply sources, and they looked to the North American market.

South Korea has emerged as Asia’s biggest customer for US crude oil this year, importing 98.67 million barrels of crude and condensate from the North American producer over January-September, up more than threefold from a year earlier, data from Korea National Oil Corporation showed. “This is part of efforts to cope with the impact of the loss of Iranian oil … the government has been helping local importers diversify crude supply sources,” said an official from the country’s Ministry of Trade, Industry and Energy.

The country’s efforts to diversify crude import sources saw the share of Middle Eastern crude in its monthly procurement basket fall below 70% during the third quarter of 2019, compared with more than 85% on average in 2016, latest data from KNOC showed.

Meanwhile, the US exported around 260,000 b/d of crude oil to India over the first eight months of this year, more than doubling the 138,000 b/d sent in the same period in 2018, according to the US Census Bureau. “The US is helping India by providing a secure energy supply while meeting its environmental goals,” Kenneth Juster, the US Ambassador to India, told the India Energy Forum in October.

Taiwan broke into the top three buyers of US crude in Asia this year, receiving 186,590 b/d of crude oil from the US over January–August. That was almost double the 100,593 b/d imported in the same period a year earlier, according to data from the Bureau of Energy, Ministry of Economic Affairs. Taiwan’s strong preference for US crude came as little surprise, as the WTI benchmark remained at a discount against its Middle Eastern and European counterparts Dubai and Brent.

Platts data shows the spread between the front-month WTI swap and same-month Dubai crude swap averaged minus $3.59/b so far in the second half and minus $5.57/b year to date. The outright price spread between WTI MEH (Magellan East Houston) on a CFR Asia basis and the UAE’s flagship light sour Murban crude on Asia delivered basis averaged minus 7 cents/b so far this year, S&P Global Platts data showed.

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