Bizarre Oil 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.”

Arbitrage Cargoes

The latest strategy for defending their share of the Asian oil market isn’t without holes in the armor. With most of the output cuts coming from Middle East producers, some buyers have been tempted to purchase rival supply they’ve shunned previously as European, African and American benchmarks have weakened against the Dubai marker. These include Canada’s Hibernia as well as Southern Green Canyon from the U.S.

“Right now, these very-long haul arbitrages are opportunistic plays on freight and benchmark crude differentials to replace barrels lost to OPEC production restraint,” Tchilinguirian said. “They cannot be viewed as regular feature of the market. Do not forget, Asian customers place a high value on the security of supply, and the longer the voyage the more delay risks in the timely arrival of barrels to the refinery.”

Stronger Dubai

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 downturn 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 generally 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. U.S. 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.

--With assistance from Dan Murtaugh.To contact the reporters on this story: Serene Cheong in Singapore at scheong20@bloomberg.net ;Sharon Cho in Singapore at ccho28@bloomberg.net To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Sungwoo Park

Copyright 2017 Bloomberg News.

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