Asian oil refiners are becoming pickier about where they source their crude as inflation rises throughout the supply chain, experts told Insider.
State energy giant Saudi Aramco has told at least four buyers in North Asia that it will supply the full volumes of the oil contract in September, sources with knowledge of the matter told Reuters. When an exporter allocates the full volume of a contract, traders tend to interpret this as supply being roughly in line with demand. A cut in the allocation would indicate a fall in demand, while an increase would reflect an improvement.
The price of oil has fallen below $100 a barrel and is about 30% below multi-year highs in early March, just after Russia invaded Ukraine.
But this is the second month in a row that Aramco has allocated the full amount to its North Asian customers, which include China, suggesting that any restrictions on the market may be easing.
Data last month showed Russia’s oil exports to China and India were 30 percent below their wartime peak as buyers in both countries scaled back their purchases.
“Demand for crude oil is clearly weakening as widespread inflation leads to further declines in purchasing power for Asian buyers,” said Ed Moya, senior analyst at OANDA in response to Saudi Aramco allocating the total amount of raw
Saudi Arabia boosted prices to Asian buyers to record highs for August delivery, reflecting some supply pressure as producers elsewhere rush to fill gaps left by the slump of Russian exports after Western sanctions.
As refiners face lower margins for products like gasoline, diesel and jet fuel, they are becoming more picky about where they source their crude. Reports this week showed that Asian buyers are buying cheap US crude as traditional Middle Eastern blends start to look a bit more expensive by comparison.
Refiners in South Korea and India bought about 16 million barrels of U.S. crude so far this month, roughly double what they bought the previous month.
Demand for Asian oil surged after Russia invaded Ukraine with countries such as China and India taking advantage of super-cheap Russian exports that had fallen out of favor with lifelong European customers. But that in turn has boosted the value of Russian oil and buyers are once again looking elsewhere for a better deal.
In mid-July, a surge in oil imports from China put Saudi Arabia on track to reach its highest level of total exports since April 2020, as COVID measures -19 of China began to ease. But with tight restrictions back in place, with millions of people locked out, demand for crude is falling along with inflationary pressures.
“A big driver for Asian crude demand is China’s outlook and that’s complicated given President Xi is pursuing his COVID strategy,” Moya said.
China is the world’s largest buyer of energy, and its imports can often account for 10% of total demand. But its cost-conscious refiners are not as willing to pull barrels from the global market and are relying instead on domestic supply, analysts said.
“China’s intra-crude crude flows have increased since the second quarter as Chinese refiners extract raw materials from other provinces, rather than buying fresh but expensive spot barrels on the international market,” said Emma Li, an analyst at Vortexa’s chief market in a recent report.
Meanwhile, other factors could be in the mix, according to City Index market analyst Fawad Razaqzada. “It could also be because Saudi Aramco has the ability to supply more crude now and selling more at higher prices is profitable for them,” he said.
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