‘Bizarre’ trades pose menace for OPEC in its prized market

Bloomberg

OPEC pumped at will the past two years to defend its turf against rivals. Its recent volte-face has left it contending with additional threats in the world’s biggest oil market.
Crude that’s rarely or never-before seen coming to Asia is now sailing from all over the globe to the region, with the door to the market seemingly held open by its traditional suppliers from the Middle East. Would a South Korean buyer like
a taste of Russian Urals oil it
hasn’t touched in a decade? Sure. What about some West Canadian Select for China and India? Yes, please. Brazilian Lula with some American shale to the trading hub of Singapore? Of course.
These and several other unusual shipments signal the price the Organization of Petroleum Exporting Countries is paying to reach its goal of eroding a glut that caused the worst price crash in a generation. While Goldman Sachs Group Inc. sees the group succeeding in shrinking inventories, OPEC’s top members aren’t relaxing. As their output curbs have made Middle East crudes costlier and rival supply attractive, they are attempting to play defense by shielding their most prized customers from the reductions.
“Asian refiners have the choice to buy crudes from North America, the North Sea, the Caspian as well as North and West Africa,” said Ehsan Ul-Haq, an analyst at KBC Advanced Technologies.
“Refiners will certainly look at arbitrage economics but with all key benchmarks showing a narrow spread with each other, there are numerous possibilities to meet their requirements.”
Saudi Arabia, the world’s biggest crude exporter and OPEC’s top producer, agreed to supply buyers in Asia all the oil they asked for March. Iraq and Kuwait did too. This was after nations such as Japan and South Korea were largely spared from cuts in the previous two months as well. The burden of output reductions is primarily being borne by other regions such as Europe and the Americas.
“So far, the market share lost in Asia by OPEC Middle Eastern producers is still modest, but this is a key market for them,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London. “So there will be limits as to how much they will give up.”
During the previous OPEC strategy of boosting production, the flow of rival shipments to Asia was hindered because Middle East crude costs weren’t high enough to make a large number of buyers turn elsewhere. But that tactic also meant global
oil prices were mired in a down-
turn that was eating into the revenue of nations such as Saudi Arabia
and Kuwait.
OPEC and 11 other nations’ agreement to trim output took effect on Jan. 1, with an aim to reduce output by about 1.8 million barrels a day during the first six months of 2017. The group has achieved a record 90 percent initial compliance with the accord, according to the Paris-based International Energy Agency.
Speculation that the producers’
actions will curb a glut has gene-
rally lifted oil prices worldwide, with Brent crude trading at an average
of more than $55 a barrel this
year. That compares with an average of $32.75 over the first two months of 2016.
Still, some crudes have been boosted more than others. The premium of Brent, the benchmark for more than half the world’s oil, against Middle East marker Dubai crude was at $1.58 a barrel on Thursday, after shrinking to the smallest since September 2015 last month. US West Texas Intermediate fell below Dubai in December for the first time since at least May.
“OPEC’s moves on production cuts will keep Brent-Dubai in a narrow range in the short term and we will continue to see such bizarre trade flows,” said Sri Paravaikkarasu, head of East of Suez oil at industry consultant FGE in Singapore.