(Bloomberg) -- Swift and bold output cuts by OPEC and its allies are boosting prices of physical oil barrels in Asia as supply tightens.
Premiums for a wide-ranging variety of crude from Russia’s ESPO, Abu Dhabi’s Upper Zakum and Qatar’s Al-Shaheen have increased significantly in the Asian spot market since OPEC+ started reducing output this month in-line with its pledge to cut almost 10 million barrels a day. Supplies of more sulfurous oil from the Middle East that are favored by a majority of Asian refiners should begin to tighten due to the production curbs.
See also: Rising Prices for China’s Favorite Crudes Show Resurgent Demand
Demand is recovering in major oil consumers China and India, led by a rebound in gasoline and diesel consumption. Chinese refiners are seeing profits from turning crude into fuels, even as processors across much of the region including Singapore face negative margins. In spite of that, buyers are continuing to scramble for cargoes after Saudi Arabia, Kuwait and the U.A.E. said they would reduce contractual supplies from June as they press ahead with planned curbs to support a market rebalancing.
“Refiners might be panicking now in light of additional supply cuts and looking to secure cargoes, especially as prices could start to rise,” said Michal Meidan, director of China Energy Program at Oxford Institute for Energy Studies. “Purchases seem to be getting ahead of the demand recovery,” potentially testing storage capacity in places like China.
In the latest trade of Russia’s ESPO crude, Surgutneftegas PJSC sold two cargoes for July loading at a premium of $2.50-$3 a barrel to the Dubai benchmark, according to traders who asked not to be identified. That compares with a discount of $4 or more just last month.
For Middle Eastern grades, Exxon Mobil Corp (NYSE:XOM). sold Upper Zakum for July loading at a premium of $1.30-$1.50 a barrel to the grade’s official selling price, compared with a premium of 20-30 cents last month. The discount of Qatar’s medium-sour variety Al-Shaheen also narrowed more than 80% month-on-month for shipments that were awarded in its monthly tenders.
Cautious Outlook
Despite pockets of demand emerging, market watchers remain cautious on the outlook due to the potential for a resurgence in coronavirus cases and the return of supplies as prices rise. Fuel stockpiles could swell should refiners increase operating rates too quickly and run ahead of themselves, said Meidan.
As for crude inventories, there are also ample stockpiles being housed in onshore tanks and vessels offshore that could hit the market as the economics of storing the crude becomes less attractive. Brent oil’s six-month contango -- a market structure where future supplies of crude are more expensive than than prompt cargoes -- narrowed sharply to $2.76 a barrel on Monday, compared with $11.34 in late April.
“There are still several unknowns regarding the extent to which oil demand will ultimately recover,” said Giovanni Staunovo, commodity analyst at UBS Group AG (NYSE:UBS). “While gasoline demand will rise as people go back to work, consumption patterns will likely be different than in pre-Covid days as society adopts a new normal at least until a vaccine is available.”
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