Insight – High Brent prices lead Asian buyers to look elsewhere for crude

AS paper crude oil heads towards US$100 (RM419) a barrel amid tensions between Russia and Ukraine, the physical markets in the top-importing region of Asia are changing their mix of suppliers to reflect widening differences in how various crudes are priced.

Brent crude futures ended at US$95.85 (RM401) a barrel on Monday. They climbed 1.5% from the previous close to reach the highest since September 2014, rising as the threat of a Russian invasion of neighbouring Ukraine drowns out any other potential price drivers.

United States West Texas Intermediate futures weren’t far behind the global benchmark, ending at US$95.46 (RM400) a barrel, up 2.5% from the previous close.

The price of the main Middle East contract, the Dubai Mercantile Exchange’s Oman futures has also been rising, though not quite at the same pace as its Western counterparts. It ended at US$92.93 (RM389) a barrel on Monday.

The Oman contract is also trading at a premium to one of the main measures of physical crude in the Middle East, namely cash Dubai, which ended at US$90.74 (RM380) a barrel on Monday.

What is key for physical traders and refiners in Asia is the difference between the various benchmarks. One of the most important of these is the Brent-Dubai exchange for swaps.

This ended at US$5.59 (RM23) a barrel on Monday – the highest premium for Brent over Dubai since 2013, and more than double the most recent low of US$2.46 (RM10) on Dec 21.

What this means is that in the space of less than two months, the cost of buying a cargo priced against Brent as opposed to one priced off Dubai has surged for Asian refiners.

It takes some time for these changes to show up in the actual flows of cargoes, given refiners typically buy at least six weeks to two months ahead of delivery.

But there are some early signs: the movement of tankers from the United States to Asia slowed in February, according to vessel-tracking data compiled by Refinitiv.

So far in February, 12 tankers have departed US ports for destinations in Asia, with one more currently awaiting loading and a further 10 potential loadings under negotiation.

This gives a combined potential total of 23 vessels carrying about 32.87 million barrels of oil leaving the US for Asia in February, substantially down on the 52 carrying 51.46 million barrels that sailed in January.

African producers that typically price their crudes against Brent also seem to be shipping less to Asia, with 17 tankers from Angola departing in February, down from 22 in January and 42 in December.

Nigeria is slated to send nine tankers to Asia in February, down from 19 in January and the lowest number of sailings recorded in Refinitiv data stretching back to January 2015.

The Russia-Ukraine tensions may also affect the volumes of Russian crude being bought by Asia refiners.

Some reports are emerging that traders are becoming wary of buying the Russian ESPO crude cargoes for April delivery because of the risk that Western sanctions will be imposed should a full-scale conflict occur.

The current high price of crude may also deter some buying in coming months, especially if there are more signs of consumer demand destruction, especially in countries such as India.

Retail gasoline and diesel prices are at, or close to, record highs in many Asian countries, including India and Australia.

India’s fuel demand dropped in January, falling 3.7% from the nine-month high reached in December, according to official data.

While a surge in Covid-19 cases linked to the Omicron variant of the coronavirus copped some of the blame for the drop in fuel consumption, it’s also likely that high prices are crimping demand – something that will likely get worse as the pump price of petrol climbs above 100 rupiah (US$1.32 or RM5) a litre. — Reuters

Clyde Rusell is a columnist for Reuters. The views expressed here are the writer’s own.

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