Spot premiums for Middle East crude are the lowest in 18 months due to Russian oil flooding into Asia, and any rise is likely to be limited, industry sources say, as it will take time for demand to recover in China after easing “zero-COVID” controls.
Middle East benchmarks Oman and Dubai crudes – used to price more than half of the oil that Asia buys – have slumped. Their spot premiums over Dubai swaps, indicators to compare values of each crude, are down 50% from November to around $1.30 a barrel, the lowest since May 2021, due to an abundance of similar quality Russian Urals crude and a bearish outlook for near-term demand.
The premiums had hit records of $15 a barrel in early March after the Ukraine war broke out.
Oil traders are in no hurry to book cargoes loading in February as they expect it will be months before the benefits of China easing COVID controls feeds through to demand.
Moreover, peak refinery maintenance in Asia typically starts in March, which would also subdue demand at that time, industry sources said.
And for all the relief in China over Wednesday’s announcement, removing some key parts of the zero-COVID regime, there are still fears that worse outbreaks of the virus could follow without the tough policies that protected people during the past three years.
Despite reports of soaring ticket sales for domestic leisure destinations, some cities warned residents to maintain vigilance, and many Chinese could remain reluctant to leave their homes.
“It will take times to translate the policy change into actual increase in fuel consumption,” a Chinese oil trader said.
The news from China failed to lift prices for Brent LCOc1 and U.S. West Texas Intermediate CLc1, with those benchmarks hitting their lowest in 2022 this week due to fears of a potential global recession.
Russia has responded to EU sanctions, and G7 nations placing a price cap on its oil by diverting exports to Asia, selling to China and India at heavily discounted prices.
But due to the weak domestic consumption, China’s rising imports since mid-October has resulted in rising inventories.
The onshore crude oil inventory in China reached six-month high of 936.18 million barrels in early December, up from 891 million barrels a month earlier, according to Vortexa Analytics.
The average operational rates at state-owned Chinese refiners are around 76% now, well below 83% in pre-pandemic era, data compiled by energy consultancy Zhuochuang showed. For independent refiners in the oil refining hub Shandong, which account for nearly a fifth of China’s imports, the run rates are about 64% versus 70%.
In the absence of a quick recovery in Chinese demand, and given the prospect of more Russian oil on its way, traders in Asia remained downbeat.
“It’s hard to see this trading cycle strengthening to the highs seen in previous cycles,” said a Singapore-based trading analyst who declined to be named because of company policy.
Source: Reuters (Reporting by Muyu Xu; Editing by Florence Tan and Simon Cameron-Moore)
