With oil prices at half of their year-ago levels and crude flooding to Asia from all directions, buyers from the west coast of India to southern Japan are, for the first time in decades, spoiled for choice.
The changing balance of power is already affecting the regional market share of key producers. With a full return of Iranian supplies now looming, following a nuclear accord this week, competition will likely heat up further, Wall Street Journal said Thursday.
Oil consumers, mainly the refineries that turn crude into products like gasoline and jet fuel, face a dilemma in this “new normal” era. Do they stick to multiyear contracts with long-established suppliers, primarily from the Middle East; or buy more oil on spot markets, getting cheaper prices but risking security of supply?
Asian refiners, located far from major oil-producing regions, previously have tied up as much as 95 percent of their crude intake through long-term contracts with reliable producers like Saudi Arabia’s state-owned oil giant Saudi Aramco.
That’s given them assurance that oil supplies will keep flowing, but made them less able than counterparts in Europe or the US to take advantage when market prices fall. Now, some of these rigid market structures are crumbling, with the 47 percent slide in benchmark Brent crude oil prices to less than $58 a barrel from last summer too dramatic to ignore.
“This is a buyer’s market, especially in Asia,” said Ed Morse, global head of commodities research at Citigroup Inc. He said Asian refiners are letting some contracts lapse or renegotiating them, and buying more oil on spot markets.
THE LIKELY END RESULT:
Oil prices will be determined by the purchasing habits of Asia’s oil refiners, which underpin the region’s physical oil market, and the market share of competing oil producers looking for a home for their oil cargoes.
The increased competition has sweetened terms for buyers, too. Indian refiners have got several Middle Eastern producers to absorb the cost and risk of oil delivery, normally borne by oil buyers. Russia’s state-owned Gazprom Neft this year started allowing Chinese buyers to make payments for oil purchases in China’s currency, the Yuan, rather than dollars.
In May, Russia became China’s largest crude supplier for the month overtaking Saudi Arabia for the first time ever, according to customs data. The Saudis also lost the top spot as India’s largest crude supplier to Nigeria, for the first time in more than four years.
More South American crude is being shipped to Asia. India’s private oil refiners now buy 30 percent to 40 percent of their intake from the region along with other heavy crudes, trade data shows, compared with less than 3% a decade ago. Heavy crudes are harder to refine and hence cheaper: Many Asian oil refiners have spent heavily on advanced refineries to process them.
