The Saudi-led OPEC cuts may have supported oil prices and reduced market volatility, but they have also opened the door wide to rival crude grades flowing into the most prized market for the Middle Eastern producers: Asia.
Reduced supplies by OPEC resulted in higher prices for Middle Eastern crude benchmark Dubai and a narrower Brent/Dubai spread, which made the shipment of Brent-price-linked crude grades to Asia profitable.
On the other hand, independent refiners in China – the so-called teapots—not bound by long-term supply contracts with Saudi Arabia—have been replacing in the early weeks of this year the now-expensive Middle Eastern grades with Urals, a Russian grade with qualities similar to the Oman crude grade and with even better refining economics, according to traders.Urals, which is priced against the Brent, is now a business-feasible opportunity for smaller Chinese refiners, after the rise in Middle Eastern benchmarks.
By including the Urals grade to its exports to China, Russia may now be able to take advantage of the OPEC cuts and further extend its lead over Saudi Arabia as China’s top oil supplier.
Chinese refinery demand helped Russia to outstrip Saudi Arabia to take the top spot in crude exports to China last year. Russia’s exports jumped 25 percent annually to 1.05 million bpd in 2016, compared to Saudi Arabia’s shipments of 1.02 million bpd, inching up just 0.9 percent.
Since the supply-cut deal took effect on January 1, the Saudis have had to strike a delicate balance between leading the OPEC cuts to show the world (and OPEC itself) that it is cutting production in earnest, and maintaining supply to buyers across the world, including its mainstay market: Asia.
The reduced OPEC supply and the more expensive Middle Eastern crude relative to WTI and Brent are helping not only Russia’s Urals to head to previously unprofitable destinations such as China. They are also raising Asia-bound U.S. shipments of crude oil.
China may also receive its first-ever Eastern Canadian crude en route into the Caribbean and on to China, Platts quoted crude traders as saying earlier this month.
Still, the Saudis are not just letting rivals chip away at their prized Asian markets. Following some cuts in February deliveries to some buyers in China and southern Asia, Saudi Aramco is said to be shipping all the volumes refiners in Asia had asked for March. According to Bloomberg, at least seven refiners in North Asia and two in Southeast Asia would be getting full volumes contracted for March.
Full article: Russia Gains Upper Hand In Asian Oil War (OilPrice)