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Asia Braces For Much Tighter Oil Markets

By Tsvetana Paraskova - Sep 06, 2018, 6:00 PM CDT
Two months before the U.S. sanctions on Iranian oil exports go into effect, Asian refiners and traders are beginning to line up their purchases for cargo loadings for November.
On September 3, the crude oil trading cycle rolled to the month of November, and sentiment in the Middle East crude trade sharply changed. Asian buyers—whose oil purchases from the Middle East are priced off the Dubai and Oman benchmarks—are anticipating tighter supplies of medium and heavy sour crude grades from November onwards, when the U.S. sanctions are expected to stifle at least part of those Iranian barrels flowing to Asia.
The market’s expectations of reduced flows of both medium and heavy sour grades from Iran lifted the Middle East crude structure at the start of September, sending the November Dubai cash and swap spread surging. This spread between Dubai cash and Dubai swap—a monthly cash-settled swap based on the Platts daily assessment price for Dubai Crude—is generally viewed as an indicator of market sentiment in the Middle East sour crude market.
The expected decline in Iranian sour supplies is a primary metric for traders in Middle East crude these days, S&P Global Platts says in an analysis, citing market sources.
Demand for medium and heavy sour grades has risen sharply in recent weeks, resulting in narrower discounts of those grades compared to lighter grades.
While Asia currently has a lot to choose from among the lighter and sweeter grades, including light oil from the United States, the North Sea, and West Africa, supplies of heavier and sour grades may tighten after the U.S. sanctions on Iran return.
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Various analyst estimates point to a loss of 500,000 bpd or even more than 1 million bpd as Iranian exports are choked off thanks to the sanctions.
Initial data from Iran’s August oil exports points to already diminishing sales, as some buyers cut their exposure to Iranian crude and seek alternative supplies. Others are scaling back their imports but are hoping to secure a waiver from the United States.
Between August 1 and 16, Iran’s oil exports plunged by 600,000 bpd compared to July loadings, Platts preliminary tanker tracking data showed.
According to ship tracking data compiled by Bloomberg, Iranian oil and condensate exports fell below 2.1 million bpd in August—the lowest levels since March 2016, with crude oil exports at their lowest since January this year.