//North Asia’s Saudi crude buyers receive up to 10% cut in November allocations – Oil

North Asia’s Saudi crude buyers receive up to 10% cut in November allocations – Oil

A number of Saudi crude oil buyers in North Asia have received up to a
10% reduction from their term volumes for November loadings, market sources
said Tuesday, a day after Saudi Arabia announced it was preparing to keep its
supply allocations for that month a record 560,000 b/d below its customers’
requests. Saudi Aramco fielded demand for 7.711 million b/d in November loadings
but would only allocate 7.150 million b/d, the Saudi energy ministry had said,
as the kingdom aims to keep the OPEC/non-OPEC production cut agreement on
track in its efforts to rebalance the market. That is far below its exports in November 2016 of 8.258 million b/d,
according to the Joint Organizations Data Initiative. Sources with North Asian refiners said the allocation shortfall was
massive, and would add to the tightness in Saudi crude supplies into Asia,
given their difficulties in receiving any extra supplies from Saudi Aramco
across its exported grades. “Our incremental supply requests for lighter grades have not gone through
since September onwards,” a North Asian refiner source said, adding that was
in addition to previously unavailable incremental heavier grade supplies. China, the biggest oil consumer in Asia, is also receiving a cut for
November loadings but below 10%, according a Beijing-based source familiar
with the matter, to meet demand from the new 200,000 b/d CNOOC Huizhou phase 2
refinery project and PetroChina’s 260,000 b/d Yunnan refinery. CNOOC started up Huizhou phase 2 on September 18. To secure feedstock
supply, CNOOC signed a one-year contract with Aramco to take one VLCC cargo of
Arab Medium a month from the second half of 2017. PetroChina also has secured incremental supplies from Saudi Arabia for
its Yunnan refinery, which started up in August. The new refinery has received
a total of four VLCCs from Saudi Arabia’s Ras Tanura port since July,
according to cFlow, Platts trade flow software. Sources with CNOOC and PetroChina declined or were unavailable to comment
Tuesday on Saudi Arabia’s term allocation cut.

POSSIBLE INCREASE IN REGIONAL SPOT DEMAND Market sources also said that Saudi Arabia’s cuts for November may lead
to an uptick in spot demand for crude from the Asia-Pacific region, and even
as far away as the US and West Africa. In the short term, Asian buyers could look to make up for any reductions
in Saudi supplies with Russia’s Far Eastern crude Sokol and ESPO, due to
their proximity, sources said. Affordable freight from Russia to North Asian destinations such as South
Korea, coupled with a widening Brent-Dubai Exchange Futures for Swaps spread,
makes ESPO and Sokol attractive alternatives for refiners here, traders said. “December prices [are] stable compared with November” for Russian grades
destined for Asia, a Chinese trading source said. “Demand is still not bad,
and freight is cheap.” A wider Brent-Dubai EFS spread makes Dubai-linked grades such as Sokol
more attractive compared with Brent-linked grades. Other traders noted that even though Aramco was not fulfilling all of its
customer requests for November, it was still increasing exports from recent
months. Saudi crude exports averaged 6.688 million b/d in September, or 462,000
b/d less than what Aramco has planned for November, according to cFlow. This compares with exports of 6.6 million b/d in August and 6.694 million
b/d in July, according to Platts estimates. “They cut allocations, but exports keep rising,” a regional crude trader
said. “Exports for September and October were less than [November].” The Saudi ministry, in its announcement, said its cuts were aimed at
showing how the kingdom is “restraining not only the top line of production
volume, but even more importantly the bottom line of exports, which are what
ultimately shape global inventories and market balances.” Saudi Arabia has in recent months urged the OPEC/non-OPEC coalition to
begin tracking exports to confirm compliance with the output cut agreement,
with frustration that despite high conformity with production quotas, some
members have continued to keep export levels elevated, delaying the market
rebalancing. The production cut agreement calls on OPEC and 10 non-OPEC countries, led
by Russia, to cut a combined 1.8 million b/d in supplies. –Takeo Kumagai, takeo.kumagai@spglobal.com
–Oceana Zhou, oceana.zhou@spglobal.com
–Eesha Muneeb, eesha.muneeb@spglobal.com
–Edited by Herman Wang, herman.wang@spglobal.com
–Edited by Jason Lindquist, jason.lindquist@spglobal.com

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