Japan Ensures Robust Sour Crude Supply from UAE in August, Yet Views Middle East Price Structure as Costly

30 Sep, 2023

Japan Ensures Robust Sour Crude Supply from UAE in August, Yet Views Middle East Price Structure as Costly

In August, Japan substantially increased its sour crude oil supply from the United Arab Emirates (UAE), acquiring nearly 10% more light and medium sour Abu Dhabi grades compared to the previous year. This surge in procurement, however, raised concerns among refiners and traders due to the escalating feedstock costs within the Middle Eastern pricing framework.

According to data released by the Ministry of Economy, Trade and Industry on September 29, Asia's fourth-largest crude importer received 1.15 million barrels per day (b/d) of crude oil from its leading supplier, the UAE, marking a 9.5% increase from the previous year and an 18.6% rise from July.

Despite the resolute stance of OPEC and its allied members to control and limit crude production, refiners in Northeast Asia faced minimal difficulties in securing an ample supply of Middle Eastern sour crude. This is largely attributed to the Persian Gulf's focus on catering to their key customers in the Far East, as confirmed by feedstock management sources at major Japanese and South Korean refiners in conversations with S&P Global Commodity Insights.

One manager at a major Japanese refiner stated, "Securing adequate Middle Eastern term supplies is never an issue since big suppliers like ADNOC (Abu Dhabi National Oil Co.) and Aramco greatly respect Japanese customers."

ADNOC has allocated full-term supplies to the majority of its Asian buyers in Northeast and South Asia for December-loading crude, according to a survey conducted by S&P Global. Although requests for increments have not been met, this indicates a consistent commitment to Asian customers.

Nevertheless, the overall price structure for sour crude appears to be on the rise, with official selling price premiums and outright prices expected to continue their upward trajectory. This situation poses challenges for Japan, which heavily relies on Persian Gulf producers for over 95% of its crude needs, as confirmed by sources in crude procurement and logistics management at two Japanese refiners based in Tokyo.

Data from METI showed a 24.3% year-on-year decline in crude imports from Saudi Arabia in August, amounting to 901,463 b/d. Meanwhile, shipments from Kuwait plummeted by 50.6% compared to the previous year, totaling 152,884 b/d. Japan's total crude imports for August dropped by 16.2% from the previous year, amounting to 2.498 million b/d.

"The Japanese yen is extremely weak this year, and it's always important to find the right term-spot purchasing ratio in times like this when both outright prices and OSP price differentials are on the rise," remarked a feedstock management source at ENEOS.

Japanese crude traders anticipate that Saudi Aramco will once again increase official selling price differentials for most of its Asia-bound crude grades. This development raises concerns that rising feedstock costs may exert pressure on refining margins.

The Middle Eastern sour crude market remains influenced by additional voluntary cuts from Saudi Arabia and Russia. The OSP differential for Saudi Arab Light crude has steadily risen over four consecutive months to a premium of $3.60 per barrel against the Oman/Dubai average for October. Many Japanese and other Asian traders surveyed by S&P Global anticipate Aramco raising the OSP differential for the grade by 30-50 cents per barrel for November.

Saudi OSPs appear expensive, and refinery run rates have been under pressure since early August due to weak industrial sector fuel demand, according to refinery sources and market analysts. Data from the Petroleum Association of Japan showed that Japan's weekly average refinery run rate fell from 84% in the week of August 6-12 to 74.2% during September 17-23.

Additionally, Japan's manufacturing output experienced a fourth consecutive monthly decline in September, occurring at a faster rate than in August. New orders for Japanese manufactured goods also decreased at a historically elevated pace in September, reflecting worsening global market conditions and ongoing destocking efforts at client locations, as reported by S&P Global economics analyst Jingyi Pan.

Pan noted, "Japan's business confidence in September also eased from August, and the sustained shedding of the volume of backlogged work in the manufacturing sector further outlines the likelihood for the downturn to persist," in a recent report.